July 15, 2010 | 3
Recycled printer paper and fair-trade coffee might have higher prices at the register, but these feel-good products often fail to bring in big bucks for companies.
But a new, counterintuitive approach could be quite profitable for corporations—and for good causes: Let consumers pay whatever price they want and give away half of the profits to charity.
The concept has been dubbed "shared social responsibility" by a group of California-based researchers, led by Ayelet Gneezy, of the Rady School of Management at the University of California, San Diego. The team asserts that this approach can outperform traditional modes of corporate social responsibility (such as corporate giving or ecofriendly products). The results are detailed in a new study, published online July 15 in Science.
To test the idea, the researchers set up shop at a large amusement park, offering 113,047 roller coaster riders a chance to buy a fatuous photo of themselves taken during the ride.
About a quarter of the participants were offered the photo at full standard price, $12.95, but only about 0.5 percent of riders shelled out for the image. Another group had a chance to purchase the picture for the same full price with half of the proceeds going to a major patient-supported foundation. This only upped sales to about 0.6 percent, while cutting profits nearly in half (due to the charity donation).
The other two groups of participants encountered a pay-what-you-want option. One of these groups had the open-ended policy, with the company getting all of the profits. Although this generated the most photo sales—from about 8.4 percent of riders—the average payment was only $0.92, which hardly covered operating costs. Offering to give to charity half of whatever riders were willing to pay turned out to be the best option for both company and charity, with about 4.5 percent of participants buying pictures for an average price of $5.33.
Not everyone is sure, however, that this policy is best for the customer. Economist Stefano DellaVigna, of the University of California, Berkeley, was not involved in the research and suggested that although some of these high-paying consumers might be motivated by pure generosity, many might also be succumbing to unpleasant pressure. "If consumers give because of social pressure, they will dislike being offered the photo with the charity option because this raises the social pressure to give," he noted in an essay published in the same issue of Science.
The researchers acknowledge that social pressure may well be a key to this approach’s success: "The cost of sending a bad signal looms large" when a charity donation is included in the chosen price. "So customers with a low value for the picture will prefer not to buy it over buying it either for a low price (bad signal) or for a high price (not worth it)," thus eliminating the low-payers from the buying pool and keeping the average price—as well as profit and charity donation—high.
The findings add another dimension to the concept of the purely rational consumer. "If people only cared about money, they would pay the lowest price possible," the authors noted. "Yet in practice people frequently pay more." The addition of a cause-related donation increased the amount people paid by more than five times.
Some for-profit organizations, including cafes, restaurants and musical groups, are already using a pay-what-you-want scale, but pairing the policy with a charitable aspect helps to eliminate the free riders, DellaVigna pointed out. "When the photo company coupled pay-what-you-want with offering money to charity, these cheapskates abstained from buying rather than paying more for a photo and engaging in altruistic behavior," he wrote.
Standard corporate social responsibility approaches can raise suspicion among consumers, who might wonder about company motives—whether managers are trying to "greenwash" a company’s image, for instance. But "because the firm explicitly exposes itself to financial risk" by allowing customers to get the product for no or little money, "a customer is unlikely to infer sinister ulterior motives," Gneezy and colleagues explained.
If the amusement park’s photo-seller were to use this shared social responsibility plan full time, it could increase profits by more than $600,000 per year over the standard full-price photo offer, the researchers calculated. And the extra customer money didn’t seem to cut back on other park purchases, with souvenir purchases in the shop directly after the photo kiosk remaining stable throughout each photo purchase option.
"Our study suggests a method in which the pursuit of social good does not undermine the pursuit of profit," the researchers concluded.
Image courtesy of iStockphoto/Devonyu
Secrets of the Universe: Past, Present, FutureX