Stanford Business magazine

The Psychology and Economics of Green Business

Everyone takes a free green grocery bag, but how do you lure stressed-out consumers and businesses to walk the green walk more consistently? Marketing students look for levers of change

ONE DAY LAST YEAR, marketing Professor Baba Shiv stood outside a Trader Joe’s near Stanford for more than an hour approaching shoppers who were leaving the store with reusable grocery bags. He gave them his business card and asked if he could call them later.

These shoppers were trying to do their part to solve a big problem: Each year, retailers pay billions of dollars to supply customers with plastic bags that are littering the planet, killing marine life, and poisoning our food chain. Paper sacks also have costs, both monetary and environmental.

But when Shiv called the shoppers later and asked if they had brought the bags with them on their next shopping trip, almost all of them said no. They knew they should have, but they forgot. Did they buy additional reusable bags? No, they went back to single-use bags.

“When people have already paid for being green but they forget next time, they’re not willing to invest more in their behavior,” Shiv said.

Shiv carried out this informal research to prepare for a week-long seminar on green marketing that he taught last September with colleague Sridhar Narayanan, assistant professor of marketing. Shiv does research on consumer decision making and decision neuroscience, especially the role of emotion in decisions. Narayanan’s research focuses on empirical analysis of marketing problems. The course was one of several seminars offered to second-year MBA students at the beginning of the school year. The short, intense seminars let both students and faculty members explore topics that aren’t part of the traditional MBA curriculum.

In the green marketing seminar, students discussed how green products are marketed differently to businesses than to consumers. They heard from speakers from product design firm IDEO, Toyota’s Prius division, and VC firm Kleiner Perkins Caufield & Byers. They visited Cisco to learn about its advanced videoconferencing technology. Shiv gave them a primer on how our emotions affect our decisions. And they tried to solve the grocery bag problem.

First, though, the students confronted an even more basic question: “Everyone is talking about ‘green,’ but they don’t know what green is,” Shiv said. Does it depend on where the product is produced or sold? Can a company that produces oil or paper products ever be considered green?

Ultimately, the professors and students concluded that green is a relative concept: Is the product better for the environment than the alternatives? The Prius, after all, is a car that uses gas. It is not a green solution if someone gives up biking to work in favor of commuting in a Prius. But compared with a traditional car it is.

“My takeaway out of the class was that being green is a process,” said Aldo King, MBA/MS ’09, who is part of a joint degree program called E-IPER, or the Emmett Interdisciplinary Program in Environment and Resources. King will also receive an MS in environment and resources. “A lot of people argue about whether something is or not, which is very binary thinking.”

The definition of green is not just an academic question. Trae Vassallo, MBA ’00, a partner at Kleiner Perkins Caufield & Byers, focuses on investing in green technology. She said her firm defines green broadly, from renewable energy generation to products that help businesses and consumers reduce their energy consumption.

Emma Wendt, a student in the seminar who later earned the joint degree, spent the summer of 2008 as an intern at Chevron, working on a project that examined the potential for voluntary carbon offsets to meet greenhouse gas emissions reduction targets. Given her longstanding interest in environmental issues, most people reacted with “first surprise and then understanding” when she told them where she was working.

“If you want to work on energy issues, then it absolutely makes sense that you need to understand where the vast majority of our energy comes from,” she said. She also realized that even small gains made by a huge oil company could have a large impact.

GREEN PSYCHOLOGY

 To sell a green product, marketers must understand how people are motivated by incentives.

Businesses, for example, have different motivations than consumers. “It’s not that companies want to be green,” Shiv said, though some do use environmental initiatives to give them an edge in recruiting employers. “At the end of the day, they’re looking at, ‘Am I able to cut costs?’” Cisco’s teleconferencing technology, for example, though it does cut down on pollution from travel, may be a bigger hit with companies because it reduces costs and increases productivity.

For companies focusing on consumers, the proper use of incentives is key to changing consumer behavior. Shiv’s research shows that both positive and negative incentives help people achieve goals, but they work better at different times.

“Goal adoption is much more powerful if there is a potential slap on the wrist for not adopting,” Shiv said. The fear of a heart attack may inspire people to eat well; fear of looking bad may make them decide to exercise. But despite their good intentions, most people won’t be able to keep up a good habit—whether it’s exercising or bringing reusable bags to the grocery store—without positive reinforcement along the way.

Social stigma, or the negative consequences that Shiv talks about, may be needed to change consumer behavior, said Akshata Murty, MBA ’06, a senior associate at Siderian, a venture capital fund that is a spinoff of a tech incubator called Tendris. Murty was previously director of marketing for Tendris, helping its portfolio companies expand into the U.S. market. Simply explaining, for example, what a difference it would make if 100,000 households changed just one light bulb apiece to a low-energy version, rarely works. “People say, ‘Why should I be one of the 100,000? Why not my neighbor?’” she said.

Emily Bailard, MBA ’09, spent the summer of 2008 exploring ways to get consumers to care about saving energy. “Do consumers care about green?” said Bailard, who was an intern with IDEO and worked on the project for the U.S. Department of Energy. “How do you get them to care about green? Do you frighten them? Do you ignore green altogether and get them to care about something else that just happens to be green?”

These psychological considerations mean companies need to look beyond the traditional market research elements of company, customers, and competition, Narayanan said. Champions and community are also important.

For a green product to succeed with mainstream consumers, the community has to want its benefits, but if the community is to see those benefits, the product first needs champions. These early adopters are likely more committed to environmental causes and “willing to take a chance,” Shiv said.

There’s a risk, though, for product designers in catering to champions, who are “more willing to tolerate inconveniences,” Narayanan said.

For example, the first electric cars had a range of just 40 miles. This may not have bothered the small number of customers for whom reducing their carbon footprint was paramount, Shiv said, but a product that demands that level of sacrifice is unlikely to have broad appeal. “Even though champions are telling you they don’t care about inconveniences, talk to the mainstream market.”

MAKING GREEN PAY OFF

 A key question about marketing green products, which became even more urgent as the economy slid, is whether people will pay more for them.

“If you look at the marketplace today, most green products are being sold as premium products,” Bailard said.

But there is only so much room in the market for premium green products. “I do not believe the mainstream consumer will pay more for green products,” Vassallo said. Thus she looks to invest in companies “that are driven by economics but also have benefits on the environment. We don’t invest in companies that are relying on what we call ‘green goodwill.’ It’s not going to build long-lasting, big companies.”

With products that involve new technology, the price may start out higher, acceptable to its champions, and then decline as the technology improves. “When new technology comes out, it’s always more expensive,” Murty said. “Over time it will be on par with the wider competition.”

In addition, as energy costs rise, the price of energy-saving products, for example, looks better in comparison to the competition.

Even if consumers won’t pay more, a product’s environmental benefits can be a powerful part of the brand. Shiv said some consumers use green products for “identity signaling,” citing the Prius as an example. Some of these consumers will pay more for the green product, though even those who won’t may choose the green product over a comparably priced non-green one.

Just as most consumers won’t pay more for green products, most will not choose products that don’t work as well as the alternatives. Vassallo, for example, said when her firm was looking at investments in electric cars, they wanted a “zero tradeoff” vehicle, not one with a limited range or questionable safety ratings.

Narayanan said companies must apply the traditional marketing rule about establishing points of parity and points of difference between a product and its competitors. Consumers must be convinced that the green product will solve their problem just as well as non-green competitors. After that, they will consider points of difference, including whether one product has environmental benefits that the other doesn’t.

Thus, Shiv said, the next generation of plug-in vehicles is more promising than the first: The cars have a gas tank in addition to a battery and can go as far as an all-gas model.

Marketing green products, then, may not be all that different from marketing any other product: “It comes down to: How does this affect me and my family?” Vassallo said.

Nonetheless, several of the students who took the seminar said they hoped its contents could be incorporated into the Business School’s broader marketing curriculum.

“It’s a perspective that’s not often taught or emphasized in a normal marketing class,” King said. He was interested in the focus on product design: how to come up with a green product that will sell, as opposed to, as he said, “Here is a product; let’s make it green.”

Shiv and Narayanan will teach the class again over two weeks in October.

The class also has sparked ideas for research, Narayanan said: the role of social networks and celebrities in product adoption, for example.

THE GROCERY BAG SOLUTION

 The principles of green marketing may seem like common sense, but applying them to real-world problems is still tricky. Considering the target audience and its psychology, students brainstormed solutions to the grocery bag problem.

“What can we do to design an experience where the customer remembers to bring the bags back?” asked Liana Vetter, MBA ’09.

Should the government outlaw single-use bags so no one store has to be the first to risk alienating its customers by not providing a bag? Could carmakers add a bag-holder to make it easier for people to store the bags? Should stores use positive incentives, like a discount or a faster checkout line, for shoppers who bring their own bags? Or should they try negative incentives, like a slower line for those who need bags provided?

No single solution seemed like it would work for everyone. Shoppers like Wendt, who rides her bicycle to the grocery store, have different needs from those like one of her classmates, a father who buys large, bulky items like diapers.

A 5-cent rebate for bringing your own bag may motivate some shoppers, but “that’s not going to work for the busy person who doesn’t bother clipping coupons,” Bailard said. “As people, we can only have so many priorities. Bringing your own bag to the grocery store for most people is not going to be near the top.”

At the root of the grocery bag problem is an issue that faces those marketing many types of environmentally friendly products, Vassallo said. When one individual’s behavior seems insignificant, it’s very difficult to get people to change. “Changing behavior is really hard.”

--By Margaret Steen

--Photo by Holly Lindem