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CSR Update: Corporate Social Responsibility Can Lead Customers to Spend More, Study Says

01/10/2019 By

Consumers are hungry for more information of all kinds when it comes to corporate social responsibility practices, and many are willing to pay more to companies that can provide it, according to a report in the Manufacturing and Service Operations Management Journal.

The study, Supply Chain Visibility and Social Responsibility: Investigating Consumers’ Behaviors and Motives, identified a strong preference among at least 70% of consumers for advertisements with more precise information about corporate social responsibility (CSR) activities compared to ones with vague information if the price did not change.

And while not all participants were willing to pay more, study participants on average were willing to pay about 2% to 10% more for products presented with accompanying precise CSR information, depending on the type of activity and the industry of the corporation.

Lessons for Businesses

Supply chain monitoring and improvements are especially desirable in industries with laborers living in poor economic conditions like apparel, electronics manufacturing and coffee production. Given the prominence of Starbucks as one of the most well-known socially responsible corporations, it should come as little surprise that price premiums were highest for CSR efforts in the coffee supply chain, with consumers willing to pay an average of 7% to 11% more based on the type of CSR activities carried out.

The study was designed and conducted by Tim Kraft, a visiting scholar at MIT’s Sloan School of Management, Leon Valdes of the University of Pittsburgh and Yanchong Zheng, the MIT Sloan School Career Development Professor.

“Our results show that social responsibility matters to customers,” Zheng said in a press release. “Yes, gaining supply chain visibility requires massive time and financial commitments. Many companies have hundreds of suppliers and those suppliers, in turn, have tens of hundreds of suppliers of their own. It is a massive undertaking to verify that everything is being done properly. And yet, our findings show that it can be worthwhile — not only for the social good, but also for a company’s market position.”

Most well-known and impactful corporate socially responsible activities are carried out by some of the world’s largest companies, like Nike and Patagonia, who disclose their entire supply chains online for consumers and competitors alike to review.

However, businesses of all sizes are using transparency to make themselves stand out from their competitors, Kraft said in an email.

“We see a lot of small companies leveraging transparency as a way to differentiate themselves in the markets they serve,” Kraft said, “and while a small company may not have the resources a large company has to manage its supply chain, a small company’s supply chain is often smaller and easier to manage.”

When asked if there was a place for blockchain in supply chain visibility, Kraft echoed the concerns of many skeptics of the technology in spite of the promise of open and completely traceable records.

“There’s still many challenges to the technology,” he said. “Just as an example, we were speaking with a chocolate company we work with and they were mentioning how they were testing blockchain technology in their supply chains. The big issue they ran into, however, was that many of their upstream cacao bean farmers did not have electricity, making the use of cellphones, and as a result, blockchain, impossible.”

The study also emphasizes the importance of firms conducting research to understand the type of consumers they are serving to better match their CSR activities and visibility to achieve the maximum marginal benefit to their bottom line.

“For companies that are trying to figure out how best to communicate their social responsibility efforts, the lesson is clear: Know your customers,” Kraft said in a press release. “Understanding their needs, values, attitudes and personality traits will help companies send the right messages to the right people.”

How the Study Works

The study consisted of a three-player game in which participants were assigned the role of a consumer, a worker or the firm. The consumer was given tokens to choose to spend (or not) on a generic product provided by the firm, who was also given a base earning as well as additional tokens to keep or spend on the worker — this allocation represents the social responsibility contribution made by the firm. The employee or worker player received a small amount of tokens to represent their wage and was not able to affect the decisions of the other participants. The study was incentivized, so all players received a cash payment proportional to their share of tokens held at the end of the game. The effect of CSR activities — that is, the amount of the firm’s allocation actually transferred to the worker player — was variable across different rounds of the game and represented different levels of visibility about those activities available to the firm and consumer.

Consumers were then asked about their willingness to pay for the given product at high, medium and low level of visibility, and at different levels of additional payments made to the worker as chosen by the firm.

Subjects also participated in a “dictator” test, in which they are given many tokens and asked to select an allocation for a second player based on low, medium and high visibility into how much of the allocation the second player will actually receive to test for self-interested biases. An exit survey tested their preference and willingness to pay premiums when presented with product advertisements with precise or vague CSR information.

While identifying that consumers clearly care about CSR by many types of businesses, the study also revealed that distinct groups of consumers are affected differently by the types of information they are presented with. If consumers are highly “pro-social,” defined in the study as willing to sacrifice their own benefit to improve the payoff for another, they are more interested in observing information about the outcomes of CSR behavior and are willing to pay more for highly visible CSR outcomes compared to the actual effort being exerted by a company to broadly change average outcomes.

Consumers who are less pro-social and more self-interested, as identified in the dictator test, exhibit a lower willingness to pay more in a low visibility scenario because they shift some of their perceived responsibility for the worker’s well-being onto the business; they justify paying less by citing the uncertainty that a firm will actually pass along the additional value they contributed.

When visibility is high, these more self-interested consumers are more likely to pay a higher price for the product, perhaps as a result of a higher personal utility of the feeling of having done “the right thing” when the process by which value is transferred can be more easily interpreted.