Opinion: Monetizing Sustainability
Sustainable” products are in short supply, despite consumer expectations. “Too expensive for customers and not profitable enough for companies”. All it takes, however, is the right monetization strategy, writes Florin Istrate, Partner at Circle Strategy.
Sales of sustainable products are struggling to take off: they represent only a small proportion of total sales of products and services, and the speed of replacement is still slow. Understanding consumer and business resistance is essential.
Consumers are frequently discouraged by price, often uncertain availability, lack of transparency on a product’s sustainable characteristics, or a failure to understand its added value. Some are even unaware of its sustainable aspects.
Three obstacles are holding companies back. Some lack interest, preferring strategies deemed more profitable in the short term. Others are apprehensive about the investment required, judged to be disproportionate to the expected profits. Finally, many lack the resources needed to transform their operating model.
An unclear definition
The monetization of sustainability is emerging as a central issue: finding the right balance between consumers’ willingness to pay more and companies’ extraction of value. But there are several complications to this monetization issue.
On the one hand, the concept of sustainability encompasses multiple criteria and sub-criteria (e.g. environmental impact, health/well-being benefits, equitable distribution of value, etc.). However, a sustainable product very rarely satisfies all of them. What’s more, this value proposition is subjective for consumers: it depends on their expectations, the consumption context and their often poor familiarity with the subject.
On the other hand, sustainability is regularly the subject of greenwashing. According to a report by the European Commission, in 42% of cases, sustainability claims are exaggerated, false or deceptive. A profusion of sustainable labels and the absence of a common legal framework are fuelling practices that lack coherence or transparency. It should be noted that few companies make an effort to educate consumers about these issues.
Finally, the pricing model for sustainable products is biased. The real extra costs associated with sustainability account for only 20-30% of the total price premium charged to the consumer.
The remaining 70-80% can be explained by cost allocation biases or by a multiplier effect on the margins of the various players in the value chain.
A 4-steps approach
Consumers, investors and authorities all have a role to play. But companies are best placed to tackle the monetization issue. There are four steps they can take to better monetize their sustainable products. Despite their trivial appearance, few companies apply these steps correctly and systematically.
First and foremost, a company needs to understand its customers’ expectations and behaviors with regard to sustainability. A detailed analysis, broken down by customer segment, will provide actionable levers.
It must then design the most appropriate sustainable offering. A sustainable product must present the main features valued by customers, while avoiding superfluous features that would entail additional costs, and thus create differentiation from the competition.
A third step is to calibrate a suitable revenue model. This involves gauging financial expectations, estimating costs, projecting expected sales volumes, finding the right pricing model and defining the optimum price level to maximize the margin pool.
Finally, getting to market involves creating ecosystems with suppliers, competitors and distributors, acculturating and actively involving customers, and implementing a coordinated sales action plan tailored to sustainable products.
By following this systematic approach, companies will be able to effectively capture market demand and overcome the obstacles to consumers’ sustainable purchasing choices. In so doing, they will promote the development of a virtuous offer and the associated creation of value.
Florin Istrate is Partner at Circle Strategy
Istrate, Florin “Monétiser la durabilité ” in Les Echos, 3/102024.
https://www.lesechos.fr/idees-debats/cercle/opinion-monetiser-la-durabilite-2123137 (in french)