They also punish companies for unethical practices.

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Research indicates that consumers are willing to pay more for ethically produced goods and less for unethically produced ones. Further, the punishment imposed by consumers for unethical practices is greater than the reward for ethical practices. Practices need not be 100 per cent ethical to obtain a premium. One implication is that the information consumers receive on production practices—good or bad—is key to the price they are willing to pay for a company's products.

Background

Companies can improve their relationship with society and differentiate themselves by signalling their products are produced ethically. Ethically produced goods are defined as goods produced under conditions of progressive stakeholder relations, advanced environmental practices and respect for human rights. Research to date yields limited insight into questions such as "will consumers pay more for ethical behaviour?" and "how ethical do firms have to be to be rewarded?" Research has focused mainly on consumer attitudes. Asking consumers their willingness to pay (WTP) for a product better predicts behaviour, and is more useful for companies making production or marketing decisions.

Findings

  • Consumers are willing to pay more for ethically produced goods, and conversely, discount the value of unethically produced goods.
  • Consumers will "punish" a company for unethical practices by more than they will reward ethical practices; negative information has almost twice the impact on WTP than positive information.
  • Increasing levels of ethical production are not necessarily rewarded (e.g. researchers found no significant difference in WTP for t-shirts which were 25 per cent, 50 per cent, or 100 per cent organic cotton).
  • Consumers with high prior expectations of companies' behaviour punish and reward behaviour more than those who previously had low expectations: the gap between WTP for Fair Trade and unethically produced coffee was $4.67 when expectations were high compared with $1.46 when expectations were low.

Implications for Managers

  • Capture higher prices by making small investments that move towards ethical production.
  • Understand what information consumers are receiving about your company and its practices. Your unethical behaviour will be punished more severely than your positive behaviour is rewarded.

Implications for Researchers

This study is the first to show that consumers punish unethical practices more than they reward ethical practices. It would be helpful to determine the "threshold" at which a company's production is considered ethical and they can capture a premium in the market. Other research could examine the effects of self-disclosed versus third-party announcements of how ethical a company is.

Methods

Consumers were assigned groups in each of  three experiments. In each experiment, the groups were provided different scenarios with information about the product and ethical (or unethical) practices in its production. The experiments looked at 1) willingness to pay for Fair Trade coffee (compared with non-Fair Trade and coffee known to be unethically produced), 2) willingness to pay for t-shirts that were 25 per cent, 50 per cent, or 100 per cent organic cotton vs non-organic cotton and unethically produced cotton, and 3) willingness to pay for Fair Trade coffee when primed with information establishing high or low expectations of the company's practices.

Source

Trudel, R., & Cotte, J. (2009). Does It Pay To Be Good?. MIT/ Sloan Management Review, 50(2): 61-68.