It was at Sustainable Brands, a conference I always make a point to attend, that I first heard market researchers discuss cost less, mean more as a key product design for winning customers.
Cost less, mean more
“Cost less, mean more” struck home for me because it aligns with economic theory which defines consumer procurement as a process of choosing between short-run trade-offs of comparative prices, convenience, the safety of loved ones and self-indulgence. This decision-making process is heavily influenced by a person’s income and job security. The Economics equivalent of “cost less, mean more” is consumers buying products based upon the “bang for the buck.”
Market research now documents a split between what consumers say they want to do and what they actually buy when it comes to sustainable products. They say they want to go green but their actual actions are mostly lower-cost efforts like buying an energy efficient light bulb or recycling an aluminum can. The economics of this gap between consumer intentions and action is tied to the higher upfront cost of many green products. For example, the economic path to lower carbon emissions is for consumers to substitute a short-run decision like filling up at the pump with a financial commitment to buy a more energy-efficient car or a redesign their work lives by relocating closer to work.
While values definitely play a role in the consumer’s decision it is price and income that are the dominant procurement factors in today’s difficult economy where the top three consumer concerns are the economy, taking on more debt and job security. For a business that charges more or requires a large up-front payment, this is a very high wall to climb in terms of growing green revenues.
Price-driven sustainable economy
The great news is that pioneering businesses are figuring out how to get price parity between their sustainable products and other less sustainable products on the market. Residential solar companies are one example. They have invested in financial tools which allow them to offer leases and power purchase agreements rather than requiring customers to pay a capital expenditure up front. This enables the consumer to choose between two monthly bills: one from a solar company and one from a utility. The business result has been impressive sales growth for solar companies like SunRun and Clean Power Finance.
The growth of a price-driven sustainable economy is not just a consumer phenomenon. Businesses are making this same type of price-driven commitment. The U.S. Energy Information Administration reports that coal use by electric utilities has dropped by 20% in just one year, falling to 36 percent of U.S. electricity generation from 44.6 percent in the first quarter of 2011. The price competitiveness of natural gas is driving this rapid fuel switch. Even the deployment of natural gas fracturing technologies is responding to price signals with the natural gas drilling-industry rapidly shifting into “closed loop” technologies to capture and recycle fracturing chemicals because the economics of doing so far outweigh the liability exposure and litigation costs of irresponsible drilling.
Organic food is another example
Organic food sales are growing at twice the rate of non-organic foods. Price trends favor continued increases in organic food sales enabled by a pricing war between competing grocers. Further accelerating revenue growth of organic foods is the growing cost of production for conventionally grown goods. The industrial-manufactured food industry experiences increasing fuel and chemical costs plus heightened pressure over the authenticity and transparency of their health/nutritional claims. The economics of organic food wins increased sales by aligning value with values.
Walmart’s strategy: everyday low prices for sustainable products
Walmart may be the most interesting example of the emerging price-driven sustainable economy. I coach a lot of business owners that are wonderful people impassioned to make a positive difference by launching a green business. They typically start out with initial sales success. But after a period of time, their company hits a revenue wall where sales slow or actually fall. The first question I ask them is “how competitive are your prices?” All of them have responded with something like ‘we charge more because it costs more to create a product that is healthy for people and the planet.’ They are right and wrong in their cost-centric pricing approach. They do gain revenue success selling to the good people who will pay more to buy green. But especially in this difficult economy where job security and spending power dominate consumer decision-making the revenue success of a product and company is heavily influenced by its price competitiveness. This core understanding on the role that price and income plays in the consumer’s decision-making process is the basis of Walmart’s sustainability strategy.
Walmart’s bedrock business strategy is to drive down costs and pass the cost savings onto consumers through lower prices. It is a winning formula they will never abandon. In terms of scale of impact Walmart is also a leader if not the leader in business adoption of sustainability. They have 500,000 worldwide work associates engaged in human health, community or environmental projects. They divert 80% of their landfill waste. And in 2013 they are launching sustainability scorecards for use by their buyers to guide what they buy and who they buy from. Walmart’s strategy is not to develop a green brand of speciality products attracting “green” buyers. Their strategy is to integrate sustainability into all their product offerings. Walmart is seeking to be the everyday low price retailer of products that are more sustainable.
$1 trillion global sustainable economy
The increasing price competitiveness of more sustainable products is a multi-trillion dollar mega-trend business growth opportunity. My economic analysis is that in 2011 the global annual revenues of more sustainable goods and services achieved a milestone $1 trillion. As early as 2017 I project the global sustainable economy will reach $10 trillion in annual sales of more sustainable goods and services. I can’t wait until June 4th and the start of the Sustainable Brands conference to learn more about the strategies and tactics of the attending business leaders that are pioneering the best practices in pricing and marketing to win competitive advantage in the high-growth multi-trillion dollar sustainable economy.
Bill Roth is the founder of Earth 2017. His book, The Secret Green Sauce, profiles proven best practices for making money going green. Through the U.S. Hispanic Chamber of Commerce Foundation’s Green Builds Business program funded by Walmart he has coached hundreds of business owners across the United States on the design and implementation of projects that restore jobs, the economy and our environment.