Today many consumers claim that they prefer to buy products from companies adhering to high environmental and social principles. However, to our surprise, no research has provided compelling evidence that consumers actually pay more for sustainable products. In fact, some market research shows the opposite – that consumers are deterred to buy socially responsible goods because of higher prices.
Since companies producing sustainable products bear higher costs, they must evaluate the implications of such efforts for their bottom line. Unfortunately, decades of corporate sustainability research has failed to come to any conclusion regarding whether investments in sustainable business practices will pay off financially.
This means that the pursuit of sustainability goals poses a paradox for companies. Either they have to bear the higher operating costs or pass on the costs to customers, which could potentially hurt revenue and profits.
Our recent article published in the Journal of Operations Management may provide answers to this paradox. Studying a sample of US manufacturing companies and their key customers over a decade, we found that manufacturers with improved environmental performance only obtained higher sales revenue from customers with a relatively high environmental performance. And sales revenues were lower with those customers whose environmental performance was below theirs.
This can be explained by the fact that most business customers aren’t willing to bear the higher costs associated with making a greener product, as most consumers aren’t willing to pay extra for environmental friendly products.
The key takeaway is that suppliers should formulate their environmental strategy by considering not only their own sustainable practices but also those of their customers.
A supplier with poor sustainability performance can benefit from expending more resources on tackling sustainability issues only when its customer base consists mainly of firms with high sustainability performance.
This research offers several practical insights. Firstly, to generate financial returns from sustainability efforts, companies should assess whether their sustainability performance is in line with that of their customers. Secondly, companies must understand the key needs and priorities of their customers, to realise how much importance is placed on sustainability. Finally, companies must engage in innovation alongside their sustainability efforts so that they can achieve cost-effective sustainable practices.
Many business cases demonstrate that pursuing sustainability goals can stimulate innovation in product design, material use and reuse, and production process. Only by finding innovative ways to advance sustainability at low cost can companies maintain competitiveness and address sustainability issues at the same time.
☛ Dixon Ho is senior lecturer in the Marketing Discipline Group at the University of Technology Sydney.