A recent article in Harvard Business Review shows consumers reward companies that offer fair products – even in price-sensitive industries such as consumer banking.
“This study shows companies don’t have to choose between sustainability and profitability,” said Remi Trudel, marketing professor at Boston University School of Management and Consumerism Editor for the Network for Business Sustainability (NBS). “The business case for sustainability begins and ends with consumer purchases.”
Researcher Christoph Loch and colleagues studied TeamBank, a subsidiary of German Volksbanken Raiffeisenbanken (VR) Group. VR Group is Germany’s third-largest provider of consumer financial services, with a balance sheet of €7.3 billion. In 2006, TeamBank launched a strategy to use fairness and transparency to create competitive advantage in a highly priceconscious marketplace. They summed up their brand promise with the motto: “We are honorable merchants.”
What Are “Fair” Financial Products?
TeamBank’s market research revealed that, while German consumers responded favorably to low prices, they were also eager for “fairness” — an initially vague concept that TeamBank developed into a specific set of products and practices. EasyCredit, the bank’s signature product, contains no hidden fees or penalties, offers personalized service and flexible repayment options, and assesses credit risk based on the consumer’s individual situation rather than socioeconomic data. The resulting loans carry higher interest rates than many of TeamBank’s competitors, but consumers appear eager to buy: the company grew by 17 per cent in 2011 despite a flat market.
“The business case of sustainability begins and ends with consumer purchases."
Transforming a Bank
The company’s transformation was internal as well as external. While enacting fairness and transparency as a marketing strategy to draw customers, TeamBank also made changes to its organization and culture that strengthened its brand. One of the earliest was a name change, from Norisbank to TeamBank. A set of core values followed, including commitments such as: “We assume responsibility (we attempt to always find a solution)” and “We earn trust (we keep promises).” The company embraces values like teamwork through practices such as a common uniform for all employees, regardless of rank. The brand is also strengthened by decisions to forgo certain products: for example, the bank does not offer point-of-sale credit, which is often associated with the purchase of cars and other big-ticket items. The company believes consumers frequently use such credit offers to make purchases they later regret or truly can’t afford.
Fair Products Drive Profits
Today, EasyCredit’s delinquency rate is much lower than average in the field of consumer credit. Regardless, the bank continues to seek ways to drive profitability. New products are tested first at TeamBank’s fifty-eight “credit shops” (storefront locations) where marketing managers evaluate the products in face-to-face customer interactions. The bank also deliberately extends loans that violate its own decision-making rules, as a means of testing and refining its criteria for credit risk. An advisory council, composed of TeamBank customers, provides ongoing feedback and serves to further enhance the company’s high degree of customer engagement. Today, TeamBank is in the running to become Germany’s number-one provider of cash loans. It is expanding into nearby countries and considering additions to its suite of products — all without sacrificing its commitment to sustainability.
“What’s interesting about this case is there isn’t any conspicuous benefit of choosing TeamBank over cheaper alternatives,” said Trudel. “With consumer product companies like Patagonia, consumers signal their responsible purchasing to others by wearing the companies’ clothes. But in the case of a bank, responsible consumption is unobservable. TeamBank’s customers are truly choosing fairness over price — without any observable social benefits.”
Key Take-Away for Business Leaders
Sustainability and profitability don’t have to be a zero-sum game. With careful planning and execution, a company can transform itself and thrive – even in a market sensitive to price and an industry skeptical about fairness. “Consumers vote with their wallets,” said Trudel. “The key is understanding what customers value and the psychology behind their choices.”
Q&A with Diane Kilcoyne, Associate Vice President Strategy Integration, Canadian Tire Corporation
NBS Director of Content Development Anthea Rowe asked Diane Kilcoyne for her reaction to the research and its relevance to her organization.
NBS: How do these findings apply to Canadian Tire? Is the development of “fair products” relevant outside the financial services sector?
DK: I think the concept is applicable outside of financial services, but I think it depends on the product and the customer. For instance, many consumers are willing to forgo “making a deal” on a new car in order to avoid haggling: they’ll seek out dealers who offer a fixed price with no haggling. And the TeamBank products are examples that answer a customer concern (common with financial products, in my view). That concern is the company might take advantage of them by hiding things in the fine print of loan contracts, which typically run to many pages and have lots of incomprehensible language. Consumers are probably willing to pay extra to avoid being surprised when they don’t read (or fear they haven’t understood) the fine print.
I think the realm of product environmental benefits is different. In terms of “fair products” at Canadian Tire, we’re currently looking at how we can cut through customers’ confusion about false “green” claims for products. We have made a commitment to being credible and specific in environmental claims, even if it means we can’t list very many “green” products. But I’m not sure that commitment will deliver big benefits, since it really depends on how much the consumers care about environmental benefits. Our research shows that our customers (and Canadians in general) care about the environment, but not to the degree they will pay more for an environmental benefit. The difference with the financial products is consumers may pay more to avoid being surprised by additional fees or being hoodwinked into overstretching themselves financially.
NBS: Are there certain categories of products that lend themselves more to “fairness” than others? E.g. Do customers care about their auto parts being durable but accept (or expect) a degree of obsolescence in certain low-priced household goods?
DK: I can’t offer more than my own personal opinion on this as I don’t have the research on customer perception around durability/obsolescence. Many of our customers are price-sensitive and look for products that perform well for a lower price. In the area of environmental products, if we can link environmental performance to either a financial benefit (e.g. lower energy bill for an Energy-Star product) or a personal benefit (e.g. cleaners that have no toxic chemicals and are therefore good for family health) then we are more successful. Our customers aren’t that interested in saving the environment, per se. Since we’re a general retailer, we don’t have a “niche” approach to our product assortment. We tend to have a good/better/ best range in any category, meaning some products are higher quality and usually these come with a higher price. Customers who are interested in durability/ value over the long term tend to select the higher-end products, but these customers are not the majority.
NBS: Editor Remi Trudel described how some consumers purchase green products because they want to signal their responsible consumption to others. Do Canadian Tire’s customers fit that description?
DK: To my knowledge, responsible consumption is not a primary identifier of our target customers. Although, I think there are lots of consumers who quietly choose responsible products – low-toxicity cleaners, for example, that others never see (unless they have friends who rummage through the cupboards when they are invited for dinner).
NBS: Anything else to add?
DK: I think it’s a stretch to say “fair” and “sustainable” are the same. The conclusion for the research summary reads: “Sustainability and profitability don’t have to be a zero-sum game.” I’m not surprised consumers respond positively to fairness, especially in the realm of financial services, where we have just survived a financial crash caused largely by big banks bending or breaking the rules. Consumers are likely very sympathetic to a financial product that promises them fairness! When I think of sustainability, though, “fair” isn’t the first characteristic that jumps to mind. To me, sustainability is more about minimal environmental impact in terms of greenhouse gases, water and air pollution, and waste. “Sustainable” products create different value for the consumer than “fair” products. In my experience, successfully marketing sustainable products depends on the customer valuing low environmental impact – either because it’s intrinsically valuable to them or because the company can drive down costs by making the product more sustainable. As a consumer who personally values low environmental impact, I find I generally need to pay much more for this benefit. So we have a long way to go because, sadly, most customers are not willing to pay more for a product just because it does less harm to the environment.
Christoph H. Loch, Fabian J. Sting, Arnd Huchzermeier, and Christiane Decker. (2012). Finding the Profit in Fairness. Harvard Business Review, 111-115.