Environmentally Friendly Products and Cost Competitiveness

This entry was posted by on Sunday, 8 January, 2012 at

Appliance subsidies, discounts, and tax credits provide cash benefits to consumers who purchase products which consume fewer resources and cause less environmental damage. The government agencies and nonprofits that fund these programs believe that consumers consider cost more important than environmental benefits, so reducing the cost of green products should lead to more sales. A study by Daniel Schwartz and George Loewenstein shows that sometimes, these discounts create the opposite effect, and discourage the purchase of green products.

The study measures two main strategies, adding a green label that proclaims the product’s environmental benefits and offering a price discount. The label increases sales, while the discount actually reduces sales if it appears without the label. The study does not explain why this behavior occurs. One answer may be that environmental advocates commonly promote the green lifestyle as a virtuous effort that hinges on a follower’s self sacrifice, like enrolling in a monastic order.

Altruistic appeal can convince a customer to spend more money for a product that provides few benefits, which may be necessary to market a product such as a bleach free cleaner that performs worse and costs more than a cleaner that contains bleach. The removal of the altruistic theme eliminates the main selling point for the product. This marketing approach also affects the perception of a brand by a customer who does not care about the environment. This customer believes that the product is not a good deal without considering the environmental factor.

These results also suggest that environmentally friendly products, such as compact fluorescent light bulbs, are effectively luxury goods. When customers demand more of a product at a higher price, the product is called a Veblen good. Veblen goods include fine artwork, luxury cars, yachts, and other status symbols that show off a buyer’s wealth, so they are more useful to the buyer when they cost more. The buyer may also believe that the product costs more because it includes better components, so it is a higher quality product.

Discounts may still have some effect on environmentally friendly products. If the discount reduces the environmentally friendly light bulb’s price enough so that a customer gains comparable performance at a lower price than a standard light bulb, a customer who primarily cares about cost still has an incentive to buy it.

The subsidy provider should consider the price of the non-green product when setting the size of the discount. If the green product is $10 and the subsidy reduces its price to $8, but a non-green product costs $5, the subsidy may be a bad idea. If the subsidy reduces the green product’s price to $4, it now has a cost advantage over every other product on the market. The subsidy will greatly improve sales, although the organization that provides the subsidy will incur high costs for that product. Eliminating subsidies for products in the first category may free up more funds to provide subsidies for products in the second category. For a product that does not receive a subsidy, this effect may help the manufacturer determine the proper price for the product.

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