Sustainable products are steadily picking up momentum in the mainstream market; more than a third of millennials are open to buying sustainable products, followed closely behind by Gen X and baby boomers. Still, many businesses are hesitant to make stronger, more material commitments to sustainability, even if the implications of their continued support of unsustainable practices are clear. Their concerns almost always boil down to this: what is the cost of sustainability for my company?
To make it all the more confusing, when considering the cost of being green versus the payoff, it’s difficult to parse out which of these fears are real or just perceived. And for many, with a finite budget to play with, it’s too much of a gamble to find out.
At Pricefx, with over 10 years’ experience helping customers set the right prices with our cloud-native pricing software, we know that cost and price is a delicate balance, especially with sustainable products that are not yet positioned to be priced as competitively as we would like.
To start with, we’ll address the real cost of sustainable business models, and later outline ways businesses can take on more sustainable practices while still protecting their bottom line.
How Sustainability Costs Companies
While the environmental benefits of adopting more sustainable business practices are clear, many companies are still stuck on the cost question. To better understand what an investment in sustainability looks like, let’s get into the market and environmental factors driving up the cost of sustainable products for businesses.
Lack of Demand
The high cost of embracing sustainable business models is regularly attributed to a lack of demand for sustainable products, which doesn’t yet match that of conventional goods. In addition to this, with a higher price tag on most green label goods, this is just as much an issue of accessibility.
Less consumer demand brings less profitable economies of scale, and less willingness of companies to produce sustainable products in higher quantities as a result, keeping the cost of sustainable production up.
Premium Costs for Sustainable Production
With good reason, sustainably sourced materials and their surrounding processes tend to cost more than more traditional methods. Fairer pay across the supply chain, longer production time as a result of giving up resource and energy-draining shortcuts, and availability of unconventional raw materials all contribute to higher production costs.
Sustainable Certification Costs
When businesses make a public pledge to go green, it makes sense to have the credentials to back up this promise. In fact, consumers are counting on it. However, applying for sustainable certification (otherwise known as green certification) can be a costly process.
With no single certification authority to turn to, that cost can vary widely by product, industry, company size, among other factors; in some cases, a sustainable certification could set your business back several millions.
While the upfront cost of certification sounds intimidating, it’s important to keep in mind that once secured, sustainable certification pays for itself. By signaling your commitment to environmental causes in a legitimate way (as opposed to greenwashing, which most consumers can easily sniff out), you’ll win over the loyalty of an otherwise alienated consumer base.
Sustainable Marketing
Companies would need to treat their entry into the sustainability market as a specialized marketing campaign. And as always, they’ll need to have enough resources to make sure their message sticks and reaches the right audiences. This cost could go up and down depending on factors like the extent to which their company already has sustainable products in its offer and how much local consumers already embrace sustainable products.
How Investing in Sustainable Practices Pays Off
In considerations of whether or not to take on a more sustainable business model, the higher cost of sustainability is front and center, while the material benefits to companies can be overlooked. Here’s how introducing more sustainable practices into your business pays off the initial investment.
Longterm Savings from Green Materials and Energy Practices
Building and manufacturing sustainable products cost more upfront – but the long-term payoff is bigger. When you consider the building industry, which by itself contributes 40% of annual global CO2 emissions, instituting green practices is one way to save money on overall lifecycle costs, especially those relating to energy consumption and maintenance, while doing minimal harm to the planet.
Lower energy and water consumption, less wasteful allocation of resources, and more efficiencies in production overall are all benefits companies can expect if they are willing to compromise some of their bottom line in the beginning to get there.
Financial Incentives for Sustainable Practices for You (and Your Customers)
Governments in most countries offer financial incentives to businesses who go beyond baseline environmental compliance and demonstrate their commitment to sustainability.
Tax credits for using renewable energy or government subsidies (such as grants and low-interest loans) for sustainable development are just a few ways governments help businesses offset the costs of their sustainable projects.
By the same token, your business can also incentivize its suppliers to use sustainable methods and materials with a rebate scheme focused on minimizing environmental impact. You can easily set up and track these rebates across your entire supply chain with the help of pricing software designed for this purpose in mind, like Pricefx’s Rebates function.
Larger Consumer Reach and Stronger Brand Loyalty
When businesses include sustainability as a core principle of their brand mission – and have the environmental track record to back it – they strengthen their relationships with their existing customers (as 88% of consumers are more loyal to sustainable companies) and win over new ones.
Purely altruistic motivations aside, B2C consumers make socially conscious choices because they believe they reflect well on their own value system, and this does not exclude their buying decisions.
Today’s consumers are increasingly wary of supporting companies that engage in environmentally questionable practices, as it calls their own sense of social responsibility into question. And in a digital age, increased visibility on misconduct means that no business is safe from scrutiny.
While B2C companies are affected most directly, companies in the B2B space are also responding to this global call for sustainability, factoring environmental impact more into their offer to customers. For example, B2B companies may now request additional variables like CO2 emission in their pricing software to calculate the right prices for CO2 neutral products.
A company’s brand messaging is rarely about profit for profit’s sake, it’s about embodying the ideals their customers aspire to. Companies should consider whether supporting unsustainable practices is worth compromising their right to make progressive claims, damaging the credibility of their brand and alienating an entire consumer segment in the process.
Next Steps: Setting the Right Price for Sustainable Products
Having considered some of the most common factors driving up costs in sustainable business models, a higher price tag for green label products is understandable – to a point.
When setting the final price, many businesses still rely more on sustainable products’ premium positioning in the market than actual production costs.
Premium pricing, low consumer demand, and low volume of sustainable goods can be a self-perpetuating cycle. Businesses can break out if they adopt a more competitive approach to sustainable pricing and present an offer closer to most consumers’ willingness to pay.
And with markups for sustainably produced goods varying widely across industries, as low as 20% for sustainable energy and as high as 220% for beauty and health, there’s plenty of room for more accessible pricing.
Want to learn how to price sustainable products competitively? Read on to discover a few ways you can start.
