When “Green” Means Premium—and When it Requires a Discount

When “Green” Means Premium—and When it Requires a Discount

When considering pricing strategies, what price premiums are consumers willing to pay for “green” products, and what types of products will they consider?
Pam Laughland August 2, 2011
There is growing awareness of the impact of product use—and disposal—on the natural environment. In response, consumers are demanding products with a lighter environmental footprint. This market demand, coupled in some cases with increasing regulation on recycling, reuse and waste streams, means many firms are re-examining the environmental impact of their products.

However, while some studies and polls suggest that consumers have an appetite for green products, these attitudes aren’t always reflected in purchasing decisions. This leaves businesses wondering when—and how—they can use sustainable products to create more value.

Researchers Leila Hamzaoui Essoussi and Jonathan D. Linton (both at the University of Ottawa's Telfer School of Management) asked how much consumers would spend on “green” products across seven categories: paper, single-use cameras, toner cartridges, tires, auto parts, cell phones and printers/faxes.

The researchers surveyed 49 graduate students, asking the maximum price students would pay for a given recycled or refurbished product, given a price (e.g. $100) for an all-new product. The students were required to disclose the maximum price they’d pay zero per cent, five per cent, 50 per cent, 95 per cent and 100 per cent of the time.

In all categories, the value (expressed as willingness to pay) of recycled/refurbished products differed from the value of all-new products. In some cases, consumers said they would pay more for the “green” version, while in others they said they’d pay less. The size of gap between new and recycled products also varied across categories.

A key determinant of value was "functional risk"—that is, whether the product performance of the “green” version was thought to be worse than that of the new version. For example, a consumer might be reluctant to buy a re-treaded tire for fear that it was less durable or safe than its virgin counterpart.

Results showed consumers were willing to pay a premium for recycled paper (i.e. the product seen as having the lowest risk). But, for re-treaded tires (perceived as the riskiest “green” product), consumers expected a deep discount to purchase recycled/refurbished—and the range over which they’d consider switching was smaller.
Overall, consumers were more willing to pay premium prices for recycled paper and single-use cameras than toner, cell phones or auto parts. So, the type of product matters when it comes to willingness to pay for “green.”

This research aligns with past work indicating that, when buying products touted as environmentally friendly or socially responsible, (perceived) functionality comes first. Assuming the perception of risk is unfounded, companies could attempt to mitigate the perception by using a credible brand or warranty with their recycled/refurbished goods.

If the “green” version really doesn’t perform up to the standards of the new one, companies need to seriously consider the implications for the firm’s identity and brand and recognize potential trade-offs. Maintaining product quality is important. At the same time, turning recycled or reused content into new products can be an attractive strategy—particularly in industries facing impending regulations requiring waste reduction or product take-backs.

It should be noted that the researchers didn’t consider different consumer segments—for instance, those with higher/lower environmental awareness. Nor did the research consider the effects of particular brands. A final limitation is the survey methodology employed: consumers will often say they’re willing to pay one amount, but not actually act that way.
Hamzaoui Essoussi, Leila and Jonathan D. Linton (2010) New or recycled products: How much are consumers willing to pay? Journal of Consumer Marketing, 27(5): 458-468.

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