Corporate Governance

Profit Maximization and Social Responsibility

By J. Robert Brown

The Journal on Monday included a story titled "Does Being Ethical Pay."  The thrust of the article concerned companies acting in a socially responsible manner and whether consumers would pay more as a result.  We have been harping on this subject with particular attention paid to Starbucks.  Starbucks is confronting problems of saturation but it is also confronting increased competition as other companies see the margins in selling expensive specialty coffees.  Moreover, for all of the problems, Starbucks had not yet even confronted the greatest threat:  The plan by McDonalds to put baristas in all 14,000 franchises.

Starbucks has become a commodity so customers will go elsewhere if the commodity is as good and either cheaper or more convenient.  The question for Starbucks is how to create increased customer loyalty that is impermeable to these factors.  It means transforming Starbucks from a commodity to an experience.

Support for this comes from the WSJ article.  The Journal studied consumer reaction to ethically produced goods.  It defined these goods as follows:

• For our purposes, "ethically produced" goods are those manufactured under three conditions. First, the company is considered to have progressive stakeholder relations, such as a commitment to diversity in hiring and consumer safety. Second, it must follow progressive environmental practices, such as using eco-friendly technology. Finally, it must be seen to demonstrate respect for human rights -- no child labor or forced labor in overseas factories, for instance.

The study looked at a number of problems, in particular coffee, and sought to determine whether consumers would pay more for ethically produced products.  The results, with respect to coffee?

• After reading about the company and its coffee, the people told us the price they were willing to pay on an 11-point scale, from $5 to $15. The results? The mean price for the ethical group ($9.71 per pound) was significantly higher than that of the control group ($8.31) or the unethical group ($5.89).

Of course, not all consumers felt this way.  Moreover, the degree of the differential varied depending upon the attitudes of the consumers with respect to their expectations about the ethical behavior of companies.  As the article noted:  "People with high expectations doled out bigger rewards and punishments than those with low expectations."

In other words, ethical behavior can pay.  Starbucks can learn from this lesson.  To the extent it puts more emphasis on social responsibility and less on its unique blend of coffee (which does not taste all that unique), it will do a better job creating customer loyalty and inducing them to pay a price higher than that charged by competitors. 

Full post as published by The Race to the Bottom on May 15, 2008 (boomark / email).