Will customers pay more to do good?

The search for better economic policy.
Oct. 19 2007 7:27 AM

Virtue for Sale

Will customers pay more to do good?

Illustration by Nina Frenkel. Click image to expand.

When Ben & Jerry's was acquired by the multinational food conglomerate Unilever * in 2000, its social mission—an integral part of the ice cream company's vision since its humble beginnings in 1978—seemed in danger. Yet the famous Vermont ice cream purveyor has remained faithful to its principled roots. Ben & Jerry's continues to give employees comprehensive health care and decent wages, source many of its ingredients responsibly (as in the fair-trade coffee beans in CoffeeCoffeeBuzzBuzzBuzz), and give generously to charity. Meanwhile, it continues to provide Unilever with hundreds of millions of dollars in revenues each year. It's a company founded on good works that has made a lot of money.

These days, everyone from big oil to Wal-Mart claims to be jumping on Ben & Jerry's bandwagon. Corporate America is busy announcing charitable-giving programs, releasing sustainability reports, and otherwise going all-out to demonstrate a commitment to corporate social responsibility. And so it's worth asking, does it pay for corporations to be nice?

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This is the question animating a recent study  (yet to be published) by Harvard researchers Michael Hiscox and Nick Smyth. They set out to discover whether customers prefer to buy from do-gooder companies. In their research at Manhattan's ABC Carpet and Home, they found that shoppers care a lot. When an item was labeled as being produced under "fair labor" practices, sales jumped. And when Hiscox and Smyth raised the prices of "fair labor" products, people bought even more than before. So, at least for ABC Carpet, being nice is good business.

We already know from surveys  that consumers claim to prefer to eat their ice cream and wear their T-shirts free from the guilt that someone may have suffered for their consumerist pleasures. Or, if they don't care about ethics for their own sake, many people believe that conscientious companies are more likely to make high-quality, reliable products. (The people running these companies would presumably feel guilty about doing otherwise.)

But economists have a general distrust of surveys, since they're about words rather than actions. That's why Hiscox and Smyth set up their shopping experiment at ABC Carpet and Home, an upscale department store in lower Manhattan. They picked two brands of towels and two brands of candles that had all been produced under fair labor conditions. First, the researchers recorded the weekly sales of the towels and candles without labeling any of them as fair-labor certified, measuring purchasing decisions based solely on taste. After a few weeks, Hiscox and Smyth spent the night at ABC sticking fair-labor labels on one brand of towels and one brand of candles. When the store reopened, sales of the now-labeled fair-labor towels jumped by 11 percent relative to sales of the unlabeled brand. For candles, the effect was even greater—an increase of 26 percent.

A few weeks later, Hiscox and Smyth were back in the stockroom, marking up the prices on the labeled towels and candles by 10 percent. Quite remarkably, this increase made people buy even more towels and candles (a 20 percent increase for towels and 30 percent for candles). The authors suggest this may be because the higher prices made the products' fair-labor claims more credible.

By looking at both towels and candles, the researchers deliberately contrasted a mundane, anonymous household item (towels) with a luxury good that was much more likely to be purchased as a gift (candles). And they think that helps explain why the fair-labor sticker boosted candle sales more. Virtuous towel purchasers are anonymous in their good deeds. When you give a fair-labor-certified candle, others also bask in the warm glow of your goodness.

The ABC experiment seems to confirm the sales benefit of Ben & Jerry's approach to business. But there's a big caveat here. As anyone who has ever paid a visit to ABC Carpet knows, its customers are not normal people. (I realized this when I first went there a couple of years ago and saw ethically sourced tree stumps selling for thousands of dollars apiece.) As Hiscox and Smyth acknowledge, ABC customers are wealthy, liberal New Yorkers who can afford to pay $15 for a candle or $40 for a single towel. So, what we've really learned is that socially minded rich folk can afford to let conscience dictate their purchasing decisions, whatever the markup. ABC shoppers, however, represent only the tiniest sliver of American consumers, and their buying preferences alone aren't enough to make American businesses kinder, gentler, and cleaner.

Will home builders at large pay more for fair-labor plywood at Home Depot? Could Wal-Mart raise prices by 5 percent to cover health-care costs for its workers, pass the cost along to its customers while telling them the reason for the higher price, and take no hit in the market? This new research doesn't really tell us. But if Home Depot were willing to let them try, I'm sure Hiscox and Smyth would be happy to spend a few more nights in the stockroom with their label gun to find out.

Correction, Oct. 19, 2007: This article originally misidentified Unilever as a German company. In fact, it is a multinational company with Anglo-Dutch roots. (Return to corrected sentence.)

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