Price Premiums for Green Products: How Much Will the Market Bear?

It’s plain that many consumers are just fine paying a bit of a price premium for green products. It’s also plain that many others are not. It gets interesting when you look at the stats across industries. In some, a large price premium is common and accepted. In others, the story is quite different. What’s going on? Is there a pattern? 

Let’s look at organic foods. Some foods, like carrots, are virtually the same cost for organic and regular, whereas some, like bell peppers, have a large price premium. With processed food products, similarly there is a spectrum: a box of organic macaroni and cheese or organic snack crackers have smaller price premiums whereas organic ice creams and organic wines may carry a higher price premium. Some of this has to do with the product’s ingredients, and how easy it is to grow these ingredients without the use of pesticides and fertilizers. Organic soybeans are fairly prevalent, as are organic carrots and other root vegetables, whereas pest-prone products like blueberries and bell peppers are a little more rare.

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But there is a lot more to this equation when we start looking across industries. Think about sustainable paper and wood products. Home Depot surprised many of us in the green business world when they started carrying FSC certified wood in most of their stores, but perhaps what was more shocking was that the wood was not much more expensive than conventional wood products. Without that FSC certification, consumers have no way of knowing if that 2×4 they’re buying comes from a forest that has been ravaged by clearcutting, or if they’ve just driven the orangutan closer to extinction by creating economic incentive to destroy one of the few remaining forests that house healthy orangutan populations in Borneo. Shouldn’t that be worth a large price premium?

Perhaps. Michael Russon, author of Companies on a Mission, argues that, “In a nutshell, the product category effect turns on the extent to which the point of differentiation creates private benefits for individuals.” In essence, organic foods have a perceived direct benefit to the consumer, whereas certified wood has a smaller perceived personal benefit. After all, consumers don’t have an uncle that is an orangutan, but many do have cancer in their family.

So how can this information be incorporated into a pricing strategy? That’s where marketing communicationscome in. Whatever the product, if it’s green, it has direct benefits to the consumer. The key is to make that connection as personal as possible. Russo further points out that when Seventh Generation changed their tagline from “Products for a Healthy Planet” to “Healthier for You and the Environment”, and included spotlighting of asthma, allergy, and chemical sensitivity health benefits, they experienced consistent double-digit growth.