The Green Bundle: Pairing the Market with the Planet
Magali A. Delmas & David Colgan
288 pages, Stanford University Press, 2018
The recent, rapid expansion of environmental products and services may make it look as if businesses are getting the most out of green markets, but that is not the case. The vast majority of consumers represent a huge, untapped opportunity. These people want to buy green, but most attempts to reach them have failed because they have not struck the right chords. People want to do the right thing. They also want what is best for themselves. The Green Bundle shows how they can have the best of both worlds, consuming goods that satisfy their wants and needs, all while doing right thing by the environment and global community. By pairing altruistic benefits with private benefits that come naturally to environmental products—including quality, status, health, money, and emotion—the vast majority of consumers who have been reluctant to go green can be reached. Human behavioral psychology can be complicated, so care must be taken to present benefits in a way that is tailored to diverse audiences. As technology continues to put enormous amounts of information at our fingertips in an instant, transparency is no longer an option—it is reality. Markets continue to evolve toward goods that are better for the environment, and the path forward contains pitfalls, such as the practice of greenwashing. Businesses don’t have to go it alone, however. The Green Bundle provides concrete strategies to transparently and effectively sell sustainable products while relying on proven tools and methods that will make life easier.— Magali A. Delmas and David Colgan
A common selling point for energy efficient appliances and energy-conservation behavior is that you can be green and save money by reducing your bills. This sounds appealing, but despite such seemingly obvious benefits, many people do not invest in efficient appliances or conserve energy. This is particularly puzzling considering that efficient appliances can offer significant savings. Energy Star appliances, rated as energy efficient by the US Department of Energy, can reduce energy usage and costs by as much as 10 to 50 percent. Replacing a refrigerator made in the 1980s with a new, Energy Star–rated model can save $100 a year in total energy costs. Replacing a pre-1994 washing machine saves as much as $110 a year. Multiply that by the ten- to twenty-year life span of most appliances, and it is clear that upgrading brings significant savings over time.4 And yet 25 percent of new residential refrigerators and 31 percent of new washing machines purchased are not Energy Star rated.
Psychologists note that our rationality is “bounded,” or limited in ways. Instead of maximizing utility, we rely on heuristics—experience and trial and error—to choose between options. Sometimes, choices made with heuristics appear rational. At other times, they diverge significantly. People have difficulty understanding low probabilities, large amounts, and value over time—factors that feed into rational calculations of a smart appliance purchase.
There are many good reasons to expect that information about cost savings will impact energy conservation. Things like turning off unused lights, unplugging charging devices, and reducing standby power are habitual or event-based actions that might require timely feedback about the associated monetary costs and benefits. The catch? Consumers rarely get good, current, or detailed information about the cost of electricity. You might expect that the problem would be easily solved with better information. That is why, in our experiment, we provided real-time data to 118 households about their electricity usage at the appliance level over a year. We wanted to help them understand the energy demands of specific appliances so they could prioritize which to focus on. As previously noted, the impact of this information campaign was negligible.
Households have false perceptions about energy use and the associated costs of their appliances. People think turning off lights is important in reducing energy bills, but other factors are much more important. We compared participants’ energy usage by source from a baseline period with the energy use they predicted before our experiment. Respondents overestimated how much energy is consumed by lighting and underestimated how much is consumed by heating and cooling. On average, the participants predicted that lights would constitute 29 percent of their usage, but the average amount was only 5 percent. They used an average of fifteen times more electricity for heating and cooling than for overhead lighting. Similar results were found in a 2010 national survey, with respondents underestimating energy use and savings by a factor of 2.8 on average—small overestimates of low-energy activities were countered by large underestimates of high energy activities.
Such erroneous beliefs could be overcome with accurate information. That is why we created a website with comprehensive, appliance-level information about electricity usage and told households how much money they could save by conserving. To make the information more tangible, we also sent them weekly messages such as, “Last week, you used x percent more electricity than your neighbor; this is equivalent to x dollars of savings over a year.” Still, there was no difference between the electricity consumption of these households and that of the control group, which didn’t have access to such information. The results caught us by surprise, especially because they contradicted what we were told in the survey before the experiment—that saving money was participants’ primary reason for conserving energy. The most likely explanation for this discrepancy is that the cost savings were not perceived as substantial enough. When households realized how inexpensive electricity was, they remained unmotivated to conserve. The average household could save only about five dollars per month by conserving energy like their most efficient neighbors— about the price of a fast-food meal or a latte. Using standard economic reasoning, one would predict that tailored information about private benefits would motivate rational changes toward more energy-efficient behavior. But there are a few reasons to believe that is not the case. First, as in our study, consumers may not pay attention when the savings potential is minimal. In the United States, the average residential electricity spending per capita is about $750 per year, or about $60 per month. The US Energy Information Administration estimates that households spent only about 3 percent of their income on energy bills. When filling out surveys, people might underestimate the various efforts needed to conserve. To reduce usage, they need to change thermostat settings, turn off lights when not in a room, run full dishwashers, and turn off or unplug other electronic devices. This group of small actions is easily lost in daily routines. The same issue comes up in other settings too. When using cell phones or debit cards, consumers who do not pay attention to past usage experience “bill shock”—that is, they unwittingly cross consumption thresholds, exceeding plans or contracts that result in usage fees or overdraft penalties.
Households might also find easier ways to cut costs and find other sources of savings in the budget. That could involve choosing to eat out less often, taking advantage of sales at supermarkets, substituting generic for brand-name prescription drugs, or making other changes that do not require paying attention to and altering their energy consumption. In general, larger incentives lead to greater behavioral responses, 18 so savings might work when they are large enough. But it remains unclear what the threshold is for people to care about energy conservation. This problem also shows up in other situations. When gas prices go down, the premium that many pay for hybrid vehicles becomes more difficult to justify. Hybrids are becoming less cost-effective relative to gas-powered cars because of lower gasoline prices and better nonhybrid fuel efficiency. This could be one reason hybrid sales declined substantially in 2016.
For our energy experiment, we attempted to boost perceptions of savings by aggregating energy-usage information on a yearly rather than a monthly basis. But it was still not enough to make a difference. The reality is probably that electricity is simply too inexpensive to make most people care. It might also be the case that by projecting savings to a more distant future, we made them seem less important.
Sending a Clear Signal
Clothing manufacturer Patagonia is widely considered a model of environmental responsibility in business. Founded by Yvon Chouinard, an avid surfer, alpine climber, and fly fisherman, the company has staked out the front lines of sustainable business practices since the late 1980s. It now bills itself as “The Activist Company.” Patagonia was the first major retailer to use all organic cotton in its clothing. It makes fleece from recycled soda bottles and pledges 1 percent of its annual sales to grassroots environmental organizations.
The outdoorsy Chouinard naturally gravitated toward environmentalism while the company was still relatively small. Concerned about the cotton industry’s reliance on toxic pesticides, Patagonia decided to go organic and worked directly with farmers to grow enough supply to meet its needs. The process took eighteen months, but since 1996, the company’s garments have been created using only organic cotton.3 The talk matches the walk. Patagonia is a well-known
leader in communicating about its green practices, adopting a transparency model. It developed an online, interactive map to give the public an inside look at the sustainability and workplace practices of its suppliers. Patagonia admits its missteps and limitations.4 People for the Ethical Treatment of Animals (PETA) called the company out in 2015 for getting wool from an Argentinian farm that mistreated lambs. Within days, Patagonia CEO Rose Marcario apologized publicly and pledged to rebuild the company’s wool program so that only humanely treated animals would be used and grasslands would be maintained. “We will continue to sell products made from the wool we’ve already purchased,” Marcario said in a statement. “But Patagonia will not buy wool again until we can assure our customers of a verifiable process that ensures the humane treatment of animals.”
Even more radically, Patagonia has taken out ads encouraging consumers to buy less, reuse, and repair the clothing they already have.6 Despite its commitment to sustainability, Marcario admitted that the company “still takes more from the earth than it returns.” Most firms can’t afford to be so aggressive with sustainability efforts, of course. Publicly traded businesses have investors to think of. Not every consumer base fits with environmentalism as well as outdoor-clothing buyers, and not every company’s founder is in the midst of a decades-long love affair with wilderness. Still, there are lessons to be learned from the vanguard, lessons that reach all the way to the bottom line.
By staking out early ground in the growing market for green products, Patagonia has profited immensely. Between 2008 and 2013 alone, the company’s profits tripled. We have already seen the numerous ways businesses slip up and greenwash—damaging brands, eroding consumer confidence, and sometimes, incurring monster legal settlements.9 So how can firms become more Patagonia-like? “First, do no harm” should be the mantra. There are concrete steps to take that will avoid greenwashing and position a business to take advantage of the expanding green marketplace.
To be sure, counteracting the drivers of greenwashing can involve substantial changes: altering firm structures, establishing new processes, and instituting employee incentives and training. The end goal is making it easier to communicate about environmental issues within the firm and the supply chain. Fortunately, businesses do not have to go it alone: credible reporting standards and eco-labels are the external keys to making these changes and providing easily understood environmental messages.
Beyond credibility, sending effective messages requires that the messages are received and understood by consumers. The credibility, clarity, and visibility of the messages are important. To ensure that green messages pierce the fog of communications and get heard and understood, here are a few concrete strategies to employ:
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Standardize the Dialogue
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Engage Suppliers
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Simplify the Message
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Choose the Right Eco-Labels
Conclusion
Human consumption is a primary driver of environmental problems. But our urge to consume is encoded in survival—it is clearly not going away. That urge can also be harnessed to solve problems, though. Information is a powerful tool to enable and move consumers toward sustainable behavior, and it is more readily available than ever before. With information about the environmental impacts of products at their fingertips, consumers can make informed choices, driving a revolution of sustainability for whole corporate sectors.
So far, the revolution has moved slowly. Many companies have failed to translate green into gold. Firms tend to be idealistic about consumer behavior, underestimating their level of sophistication or relying too much on rational decision-making models that don’t account for biases in human decision- making. Furthermore, many have taken a piecemeal approach that decouples green messages from actual organizational practices, leading to inconsistencies and fomenting distrust.
People care increasingly about the environment but are busier and more skeptical about environmental claims. Products are usually not purchased simply because they are better for the environment, and product quality cannot be sacrificed for sustainable goals. Largely, today’s consumers are convenient environmentalists—they will buy green, but it needs to be on their own terms. Complicating matters has been a steady stream of firms getting exposed for greenwashing and making other false representations. This has made consumers distrustful of green messages. And they are confused about what is really good for the environment in the first place. So, how do you reach these people—a majority of consumers—and convince them to buy green?
The answer lies in the green bundle. Messaging that pairs sustainability with private benefits creates a win-win for consumers. They are not only doing right by the world but also doing the right thing for their own lives. In a sense, they get to have their cake and eat it too—they benefit psychologically from their altruism and benefit in a more tangible sense from added value.
Of course, to change consumer behavior, firms first need to get their message right. This goes beyond communications. It requires adopting a culture of transparency and framing authentic messages that resonate with consumers. At a time when information zooms around the world in an instant from any handheld device, transparency is an unyielding force. In most cases, the cost of resisting is greatly outweighed by the benefits of embracing this force before competition. We propose a holistic approach that begins with the firm and ends with the consumer.
We explained how to convert green intentions to purchases using evidence-based approaches rooted in behavioral principles. There are two pillars to effective information strategies: (1) awareness and understanding (which engenders confidence) and (2) willingness to pay. To reach customers, green messages must pierce a busy cloud of green information. The message must be clear and credible. These may seem like simple imperatives, but many companies fail to hit all of the notes.
Practice green modesty and transparency. CEOs are pivotal to developing clarity and credibility. Rightly seen as figureheads for the companies they manage, they must exemplify a sustainable ethos in their personal and professional lives or risk damaging the credibility of the firm’s efforts. Going green cannot be delegated to a marketing department or PR firm. Fortunately, managers do not need to reinvent the wheel to get a credible message across. They can use external tools such as eco-labels to develop a sound, credible information strategy. These tools give firms clarity about environmental impact while allowing them to remain modest in their claims and thus resist the temptation to over promote eco-friendliness.
Indeed, one challenge that often arises (and leads to inadvertent greenwashing) is lack of coordination among different units of an organization. This can cause marketers, for example, to overstate environmental benefits because they do not understand the complexity or impacts of a new product from R&D. To avoid this pitfall, CEOs need to set the tone by clearly stating their green modesty, instituting proper incentives, and relying on codes and standards that promote an ethical climate. These standards can bring about consistency of dialogue regarding environmental metrics. The ISO 14001 international environmental-management-system standard and the Global Reporting Initiative can be helpful tools for initiating this process. The risk of misunderstanding a product’s green impact becomes even more likely when several organizations are involved, such as when a supplier is not forthcoming about the environmental impacts of its materials. Although this may come as a surprise, even today many firms do not know the environmental and social impacts of their suppliers. Supply-chain environmental-sustainability scorecards are one way that companies can begin to take charge of this information.
Once firms better understand the environmental impact of their products, they face the challenge of translating this information not only into a clear signal that can be understood by consumers but also into something that consumers care about.
Firms can communicate about sustainability to consumers through two avenues: their own communications and eco- labels. Eco-labels identify products or services that have proven environmental advantages within a specific product or service category. They provide more legitimacy than firms’ own communications, especially when they are third-party certified. But not all eco-labels offer the same credibility and recognition, so care should be taken when choosing them. It is also important that a label is recognized by consumers, transparent about its certification systems, and clear in communications about the environmental benefits.
Most information strategies stop here and thus generate only a small number of responsive consumers. The steps just described, though necessary, are insufficient to make consumers go green. Again, there is little willingness to pay for environmental benefits or the public good alone. Moreover, research shows that if there is any perceived trade-off in quality, even fewer people are willing to pay.
Consumers’ willingness to pay is a less explored piece of the puzzle for green markets, but it is the key to developing effective informational strategies. This is where the green bundle comes in. Consumers will translate aspirational beliefs into actions when they see green products as being bundled with private benefits, such as health benefits or improved quality. Firms need to bundle environmental or public-good benefits with private benefits, including better performance, enhanced status, improved health, money savings, and even emotional returns.
Emphasize increased quality. Few are willing to pay a premium without some measure of private benefit. Conversely, with certain goods, such as cleaning products, consumers may confuse or associate eco-labeling with poor quality. It is therefore important to communicate quality alongside environmental virtue. The Clorox Company promotes the view that natural cleaners are at least as good as their conventional counterparts by boasting that products with the Green Works label “clean with the power you expect.” In many cases, there is a natural overlap between quality and greenness. Performance, functionality, usability, durability, comfort, and convenience are all attributes that can be effectively bundled with sustainability.
Leverage peer pressure. Most of us care what others think, and we like to display the good things we are doing. The unusual appearance of the Toyota Prius became a selling point after the car was used to bring Hollywood stars to the red carpet of the Academy Awards. Suddenly, this strange-looking vehicle could make people look like stars themselves. Status is a powerful tool to compel behavior in the marketplace, and it is particularly effective when consumption is highly visible. Not all products are as conspicuous as a car, however. Using information technologies and social media, less visible products such as energy consumption can be made more conspicuous and therefore subject to social pressure.
Promote health benefits. Research shows that the most important reason we buy green is for our health and the health of our families. Health is the main reason people choose organic products that are produced without chemicals. Thus, it was not surprising to see that, over a ten-year period, the organic-food market grew 238 percent, from $8.6 billion to $29 billion, while the overall food market grew 33 percent. Health attributes are an important private benefit that can be associated with green products. In our field experiment on energy conservation, we found that messages on the health impact of electricity-generation successfully led households to reduce energy consumption.1 But people do not always make the connection between environmental and health benefits. Information campaigns are one way to close that link, and there are critical times when consumers will be more receptive to campaigns about environment and health. These include national health crises, such as the water contamination in Flint, Michigan, which raise awareness and lead consumers seek strategies to protect their health. They also include personal times in individuals’ lives, such as when they start a family or face health problems.
Unravel monetary returns. Money is the most cited reason to avoid or embrace green products and services. Premiums often scare consumers away, whereas monetary savings associated with saving energy or resources are appealing. But perceptions of premiums or savings vary widely depending on context or reference point. How financial incentives are framed makes a big difference; framing can help consumers overcome their subconscious cognitive biases. Small savings framed as a tax or a loss can be quite effective, and raising a product’s price can even help in some situations. Context matters, so anchoring prices and decoys are potential tools that can convince consumers to buy.
Stimulate empathy. The final piece of the green bundle is the emotional connection between the consumer and the sustainable products. Consumers will empathize with a cause when the story is told the right way. In addition, they need to believe their purchases will make a tangible difference. Communications about green products must be both relatable and emotionally compatible. A wise company will invest in marketing that does this effectively and legitimately.
It is imperative to bridge the distance between green consumption and impact, making the benefits of consumption tangible by showing how they help a specific person. TOMS shoes has successfully established that kind of connection with their concept of one-for-one donations based on consumption.