Sustainable Pricing Strategies

Introduction to Sustainable Pricing Strategies

• Flights from Los Angeles to New York can cost over $1000, marketers are enabling consumers to offset the carbon cost of travel
• An emerging industry review examined 11 firms offering offset services, which use different methods and contrasting ways to offset carbon
• These firms were developed in response to consumer environmental concerns
• There is a growing number of true blue and LOHAS consumers willing to offset environmental costs and businesses that are embracing environmental entrepreneurship
• Sustainable Travel International (STI), founded in 2002, is a not-for-profit organization reducing the toll that travel and tourism take on the environment and local cultures
• Founding sponsors of STI include Continental Airlines, United Airlines, and Enterprise Car Rental
• STI estimates the carbon cost of a Los Angeles–New York trip at 1.78 tons of carbon dioxide per person, offsetting the cost at around $45
• The pricing strategy of STI enables passengers to offset the carbon cost of flights by contributing to sustainable forests in various countries, including the United States, China, Ghana, and India
• STI has offsetting programs for auto travel, gifts, events, conferences, home energy usage, and hotel stays, also providing travel tools and tips to reduce environmental costs

Pricing Strategy Development

• The Sustainable Travel International example highlights the role of pricing in sustainable product offerings
• Marketing decisions need to flow from organizational objectives
• Proper pricing of products enables a firm to achieve its objectives
• Development of pricing strategies must be linked to the organization's overall strategy
• The development of the pricing strategy involves a multistage process, which results in the proclamation of value
• The process begins with determining the corporate mission and objectives, followed by developing pricing objectives that complement the overall goals
• Objectives converted to specific actions to achieve pricing goals and overall objectives of the firm
• Internal constraints (costs of production, sales, and delivery) and external constraints (customer demand, legal considerations, and competition influence) are considered before conversion
• After considering all factors, the firm can proclaim the value of its product offerings through pricing strategies

Internal Pricing Constraints

• Internal constraints include the costs incurred to produce, sell, and deliver a product
• Costs must be covered for a firm to generate profit
• Fixed costs do not change in the short run, while variable costs fluctuate with the amount of product sold
• Fixed costs are exemplified by investments in real estate and equipment
• Electricity consumed on an auto assembly line exemplifies variable costs
• Sustainability efforts require consideration of both fixed and variable cost elements
• Consider how costs are allocated among products manufactured at a specific location
• Ford invested over $2 billion in the Rouge River plant to enhance sustainability, accommodating interest groups such as employees, communities, and NGOs
• Costs allocated across products from the Rouge River plant are paid by consumers
• Ford invested €332 million with Peugeot to develop diesel engines
• The diesel engine investment is allocated to diesel vehicles due to consumers' motivation to purchase fuel-efficient cars
• Ford faces a challenge assessing consumer response to enhanced production sustainability in the Rouge River facility because of consumer preferences
• Consumer response to sustainable components enables estimates of returns from specific segments
• Customer demand must be considered in allocation and pricing decisions

Customer Demand and Value

• Grocery stores offer products that offer customers different levels of value
• Retailers offer competitively priced private-label products with similar ingredients to nationally advertised brands
• Walmart's Equate brand is sold at a lower cost, but higher gross margins than name brands
• Retailers can increase revenue by offering products for different market niches with different values
• To assess a market's potential, it is important to understand what is valued by customers
• Understanding value does not necessarily include green marketing or sustainability
• Consumers rarely cite green marketing issues as the primary motivation for consumption
• Traditional selling considerations include price, quality, and performance
• Brita water filtration products offer health, fitness, and vitality benefits
• They also have lower costs than bottled water, prompting consumers to invest with the added benefit of reducing the size of landfills
• A strong interest in the biological benefits of a product outweighs the sustainability benefit alone
• A proper value assessment is needed
• Value is defined as desired benefits over relative costs
• Purchase decisions involve trade-offs, so consumers must forgo value for superior value
• The benefits of a product speak more to what it does for the consumer rather than its components
• Effective marketing campaigns focus on meaningful product aspects for the consumer
• Green product promotions alone will not stimulate consumption
• The Ford plant on the Rouge River rebuilding at a cost of $2 billion is a promotion of benefits that do not resonate
• The environmental issue of burning fossil fuels is not addressed
• Focuses on issues at the heart of auto purchase and consumption

Competitive Advantage and Costs

• A sustainable competitive advantage helps a company outperform the competition
• Developing a competitive advantage requires the firm to assess its offerings relative to the competition and focus on relevant aspects of consumption
• Consumers replacing a worn-out water heater have fuel and energy efficiency options
• Marketers should understand that consumers are immediately aware of heated water benefits
• The purchase decision gives strong consideration to the heating capability of alternative appliances
• Consumers rate gas heaters as superior due to their ability to generate hot water
• Marketing the efficiency of solar power may not resonate if other benefits are discounted
• Analysis of benefits must focus on the product's merits for the consumer
• The cost of the product is substantially more than the price, requiring examination of acquisition, possession, usage, and opportunity costs
• Acquisition cost refers to the energy expended to make a purchase, including the time dedicated to research and evaluation
• Reduction in cost is associated with increased revenue
• Familiar brands require less time for evaluation
• Possession cost includes expenditures like taxes, insurance, and transportation
• A desire to get a replacement as soon as possible after realizing the initial heater is not working means customers may not transition from electric to fuel-efficient alternatives
• Solar water heaters take long to install and more space
• The third facet of costs are the usage costs: costs of operations and disposal costs
• New technologies offer energy efficiency that yields lower costs in usage relative to alternatives
• Marketers should present products to illustrate the trade-off between acquisition and usage costs
• Promotion online and at the point of sale illustrate that an Energy Star appliance will be cheaper in the long run

Disposal Costs

• Disposal cost is an increasingly important factor.
• The European Union and the United States require electronics manufacturers to reclaim products
• Policies implemented require end-of-life take-back of products
• The Product Stewardship Institute (PSI) reduces health and environmental impacts of consumer products
• PSI encourages product design changes and mediates stakeholder dialogues
• PSI supports product end-of-life legislation in American states
• Proper disposal of paint costs $8 per can of 64 million gallons, or 10% of amount produced
• PSI has initiatives that address reclaiming medical waste, pharmaceuticals, fluorescent lamps, thermostat manufacturers, and phonebooks
• The final element of cost is the opportunity cost from the consumer
• The purchaser of a gas appliance forfeits the chance to invest, since the average car runs for 17 years, forfeiting opportunity to use more fuel-efficient transportation alternatives

Real, Superior, and Profitable Value

• The value assessment can be determined when the firm has identified the benefits to relative costs
• Successful products must be real, superior, and profitable
• Real value must have relevance to an identifiable market with specific customers and segments with desired benefits exceeding perceived costs
• The ratio of benefits to costs must exceed one, with research done for various market segments
• The buyers of a Toyota Prius can be distinguished based on the perceived importance of ecological performance and fuel efficiency
• The value of a product must be superior to competitors
• The traveler between New York and Boston may choose a railroad over an airline due to convenience and a lower carbon footprint
• The advocate of sustainability who understands the breadth of benefits and costs of alternative products is more likely to influence one over another
• The value of a product offering must be consistent with the firm's mission and must have financial profit for ownership with various value ratios
• Various value ratios means devising multiple products with multiple value offerings and markets

Legal Constraints

• Legal constraints refer to regulatory requirements, like sourcing components, promotions, and product disposal
• Adherence can result in higher costs of sourcing, production, distribution, promotion, and disposal
• Constraints established internationally, federally, regionally, and locally (Kyoto Protocol)
• EU new regulations result in greenhouse gas emissions incorporated into planning in 600+ cities worldwide
• The U.S. Environmental Protection Agency (EPA) creates and enforces regulations
• The Clean Air Act (CAA) enforces air pollution regulation via the EPA on stationary and mobile sources
• The CAA regulates auto assembly and operations
• The Supreme Court ruled in 2007 that the CAA allows the EPA to regulate carbon dioxide as a pollutant, also regulating vehicle emissions
• The Clean Water Act (CWA) limits water pollution
• Major industries and municipalities must adhere to the CWA (technical tools, financial assistance, water quality standards) for permitting
• Organizations must adhere to state and local regulations such as San Francisco's Green Building Ordinance, California Global Warming Solutions Act which strives to have 1990 gas emmission levels by 2020

Competitive Action

– Pricing decisions must take the environment into account – Decisions must consider the market and nature of the competition – Chapter 5 characterized 5 segments of consumers – Must examine the extent which consumers value higher ecological benefits – Some markets have strong preference for green products, like Starbucks fair-trade – Competitive landscape considered with consumer attitude – Must examine differentiability based on greenness – Lean green and defensive green marketing is appropriate with limited differentiation – Heavy-duty truck market doesn’t use hybrid tech – Firms do not incentivize green tech purchase – Firms benefit from price strategy that benefits green tech – Ecological concerns not there, no emphasis on green factor – Marked opportunities to distinguish product offerings – Must consider size of the markets

Pricing Strategies

• Develop a wide arsenal of strategies
• Enable firms to increase revenues and address sustainability objectives
• Carbon Offset Pricing: consumers directly compensate for product greenhouse gasses
• Competitive Pricing: strategies that reflect the firm's position in the market
• Product Line Pricing: strategies focused on relationships among products in the product line

Carbon Offset Pricing

– Company enables purchaser to compensate for gas – places cost of sustainability directly in the hands of consumers – determination of carbon related cost of product and the cost of the offset investment – Contintental Airlines partnered with Sustainable Travel International and offers passengers chance to offset carbon dioxide-related costs – STI determines average greenhouse gasses emitted per passenger – 0.64 metric tons short-distance, 2.75 metric tons long-distance – Offers different offset programs – Conservation Carbon offset: reforestation in Africa and Asia – Green Tag: renewable energy in North America

Competitive Pricing Strategies

• Strategies are based on the firm's position
• Break-even pricing is the attempt to establish a price that covers all operational costs
• Must detemine fixed and variable costs and demand for the product
• Price is the total fixed and variable costs divided by the units sold
• Essential to many decisions regardless of sustainability
• Strategy forces the firm to determine its costs and lowers operational cost
• Propane can switch to biofuels to be more sustainable and cut costs
• Cost-based pricing adds a markup to the cost used by utility, can influence customer by showing green prices and costs translate to lower prices
• Staples drops enery to 7% below 2001 lowering greenhouse gases
• Value-based pricing uses consumers perceived valued based on product
• Start by identifying desired benefitd and costs
• Energy star products are 20% more efficent but initial cost is higher than regular products weighing costs
• Status-quo price is same price and very competitive for consumers to compete for sustainable companies
• Skimming sets a price for consumers willing to be higher and priced sensitive for generations
• Household cleaning is higher prices and works for true market, P&G bounty sells low costs
• Penetration pricing attempts to increase rapid market share and subsidize by saving energy and bulbs for subsidies