Price is political. Here are three ways to kill the sustainability tax that makes more sustainable products more expensive.
Let’s begin with a thought experiment. Imagine it’s time to do your weekly grocery shopping and, like the average shopper, you have about $55 to spend for the week for your family of four.
First on your shopping list: eggs. You survey your options at your favorite grocery store. Here’s what I found at mine: 12 large white eggs are $2.12; 12 Cage Free brown eggs are $2.67; 12 Organic Cage Free brown eggs are $4.17. Which do you choose?
Remember, you have $55 for the week.
Next up: cleaning products. The conventional Clorox with bleach is $3.49 for 32 fl oz. Seventh Generation eco-friendly spray is $4.47 for 26 fl oz. Ecos eco-friendly spray is $10.40 for 22 fl oz. Adjusted for volume, that makes the eco-friendly cleaning products 1.7 to 5 times the price of Clorox.
Now for period products. Conventional Tampax Pearl tampons (with handy plastic applicators, my personal bete noir) are $7.78 for 36 (21.6¢ each). Tampax also offers organic cotton tampons for $7.78 — but for a box of 24, not 36 (32.4¢ each). Seventh Generation organic cotton tampons are $26.73 for 36 ($1.03 each). The organic tampons are 1.5 to 4 times the cost of the conventional.
Baby onesies? 9 Gerber regular onesies are $21.47 ($2.38 each). 5 Gerber organic onesies are $29.39 ($5.87 each)
Your conventional cart totals $37.12. The organic or “sustainable” cart totals $99.07 — if adjusted for price per unit so you get the equivalent amount of everything.
Remember, your budget is $55. Which cart do you choose?
Now imagine it’s that same evening. You’re watching the news and a politician is railing against ESG and invoking the “get woke, go broke” axiom, claiming sustainability is bad for business, the economy, your pocketbook — and the nation.
Would your experience at the grocery store make you more or less inclined to believe him?
Price is preventing consumers from behaving in more sustainable ways.
Barrier 1: The barrier of behavior
It’s not news that sustainable products frequently cost more than conventional ones. Graceann Bennett and I first wrote about this in our 2011 research paper Mainstream Green, when manufacturers were charging up to a 100% premium on more sustainable products and services. This runs counter to the normal paradigm: taxes are usually levied on behaviors we wish to disincentivize, like smoking, but when it comes to sustainable products, consumers are being asked to pay more for doing the right thing. Graceann and I coined the phrase “Sustainability Tax” to describe this phenomenon. And I’m not calling out brands mentioned above; this is an economy-wide issue. A more recent Kearney study confirms this de facto sustainability tax is still alive and well. Bill Gates describes these price disparities in a broader macro-economic context (think: green energy, green cement) as “Green Premiums.”
The Sustainability Tax creates practical barriers to consumer adoption of more sustainable purchasing habits. Our 2011 research respondents cited price as the #1 barrier to purchasing more sustainable products, and a 2022 Deloitte study confirmed that price still exerts a chilling effect on sustainable purchases: the percentage of consumers stating they had recently purchased a sustainably produced good or service declined across more than a dozen countries; cost was cited as the top reason by a significant margin.
This is the first barrier that price creates — the barrier of behavior: Price is preventing consumers from behaving in more sustainable ways when it comes to their consumption habits, despite the best of intentions.
Barrier 2: The barrier of belief
But the barrier I’m concerned about here is a different one; less direct but perhaps, more insidious. It’s the barrier of belief. Because what are consumers – who are also voters – to make of a sustainable grocery cart that costs more than double its conventional equivalent? Or a vehicle? The base price for a conventional Ford F-150 XL (the lowest price model) is $33,695. The lowest price (or base MSRP) for an F-150 Lightning (the EV version) on Ford.com is $59,974 (although some consumers may qualify for up to $7,500 in federal tax credits under the federal Inflation Reduction Act , or IRA.
What are consumers – who are also voters – to make of a sustainable grocery cart that costs more than double its conventional equivalent?
The aggregate impact of years of confronting higher price tags at supermarket shelves — and electric car showrooms, organic coffee shops, eco-friendly sneaker stores and ethical clothing websites — is a prevailing and deep-seated belief that sustainability is more expensive, reinforced with every trip to the grocery store.
And what happens at the grocery store doesn’t stay at the grocery store. Those high price tags pollute perceptions, with ramifications that go far beyond the shopping cart. Our research found that 50% of Americans believe sustainability is for rich elitist snobs and crunchy granola hippies, not for people like me. That’s a perception shrewd politicians can exploit. It will be hard for consumers, who are also voters, to believe sustainability will be good for the economy or good for business so long as it is bad for their pocketbooks. They will shop — and vote — accordingly.
In this way, consumer product prices create fertile ground for the anti-ESG politicians’ messages. Price sends a powerful signal that plays into shaping the beliefs that govern behavior. The “Sustainability Tax” must go if the barriers of behavior and of belief are to shift – and enable change.
Barrier 3: Tax-killing tips
Fixing this problem is not straightforward and it is not an issue confined to consumer pricing — but that is my focus here. There are myriad reasons it may cost manufacturers and brand owners more – sometimes much more — to bring a more sustainable product or service to market, many of them upstream in the value chain: R&D investments; higher costs of more sustainable raw materials; price premiums on clean energy — and the list goes on.
Consumer product prices create fertile ground for the anti-ESG politicians’ messages
In the US, incentives like those offered under the IRA will help in some sectors. A carbon tax could help level the price playing field in many cases. But as long as that remains politically unfeasible in many jurisdictions, including the US, and as long as broader, systemic issues persist, we need ideas that companies execute and communicate quickly. I don’t have the answers but I do have some tactics that brave manufacturers and brand owners could explore right now to begin chipping away at the barrier of belief:
- Cut discretionary sustainability premiums: Let’s be honest: some manufacturers are charging more for more sustainable products and services simply because they believe they can. We live in a world that still treats unsustainable as the default. In this mindset, sustainability is viewed as a luxury or as added value — and therefore an opportunity to charge more. I’m all for sustainability as a business opportunity but higher prices undercut the sustainability goals that companies claim to espouse. Pricing and profit should be factored into ESG scores.
How would you price products differently if you treated sustainable as the default and conventional as the outlier — and counted environmental impact as part of the cost of conventional goods? Examine the trade offs between margin and volume to assess whether losses from lowering prices on your more sustainable products could be recouped through increased volume from all those shoppers who would prefer to be buying sustainable and can’t currently afford to. There is an opportunity to build brand love and loyalty by communicating to consumers that you don’t believe they should have to pay more for sustainability. Normalize the price and you normalize sustainability – overcoming the barrier of belief and achieving sustainability more quickly.
- Take a more creative approach to portfolio price management: Retailers and manufacturers that sell both conventional and sustainable products can examine their portfolio pricing strategy. If bringing a more sustainable product to market actually costs more, should those added costs be levied on the sustainable product, or could they be amortized across your portfolio as part of a strategy to meet your stated goals?
In Mainstream Green we called for companies to work on the accounting on the back end, so that sustainable products are offered at price parity or are preferentially priced relative to their conventional counterparts. What would happen if you flipped the paradigm, increasing prices of conventional products and lowering the prices of sustainable products? Your P&L could still end up in the same — or even better as you bring sustainable costs down and build customer loyalty and revenue. And as demand for sustainable products increases, volume should help drive down those value chain costs. Imagine the consumer’s delight at discovering they could choose the product that is healthier for their family and for the planet, with price no longer a barrier. Normalize the price and you normalize sustainability.
- Ban this market research question: My personal pet peeve? Headlines like this one: “Consumers willing to pay up to 10%/30%/50% more for sustainable products, says new market research study.” Every time I read a headline like this, I cringe. The results from this survey question are deeply unreliable, suggesting consumers either will or won’t depending on the study (google “will consumers pay more for sustainable products” if you want to see what I mean). The real world evidence is also inconclusive, especially in times of economic instability. And asking consumers this question sends them the wrong signal (e.g. “sustainable products cost more”). All these subtle cues add up to further reinforce the barrier of belief. Please stop asking consumers in market research how much more they would be willing to pay for sustainable products and services. They should not have to pay more. This question reveals unwitting bias among supposedly objective surveys, and reinforces the wrong mindset.
Higher prices undercut the sustainability goals that companies claim to espouse
These tactics are only first steps toward fixing the Sustainability Tax. They are not for the faint of heart and will work best if companies that say they support sustainability take these steps to actually do so — and collectively shift the paradigm, at scale. Shifting the price signal will shift value perceptions, dismantle the barrier of belief and bring some peace to this battlefield of the culture wars.
Once sustainability makes sense for our pocketbooks, it will be harder to argue that it’s bad for business and bad for the economy. That will require companies that want to be seen as sustainable to rethink how they price goods, and whether their pricing advances their goals or inadvertently undercuts them. It will also take some of the wind out of the anti-E.S.G. movement’s sails, and help sustainability scale.
Editor’s Note: This is the latest in Freya William’s series on ways to address dynamics surrounding the debate over ESG ratings and sustainability.
Featured photo: Organic egg prices in Indianapolis, January 2023