Friday, 10 January 2014

Spending to save the world

In the business world today, marketing is increasingly tapping into the consumer psyche of the masses. The corporate social responsibility of big businesses today arguably takes more from society than what they give to it.

Companies are expected to do more than just sell a mere product in the business world today. Probably the best known subject for example is Toms, a for-profit company with a social cause that has mass public appeal. The company employs a “1 for 1” concept where the company delivers a free pair of shoes to someone in need in an impoverished country through NGOs for every pair bought as a product in its home country. Depending heavily on corporate social responsibility, Toms has made a success out of this business model better known as the B1G1 model (Buy1Give1 model).

The B1G1 model has tapped into the psyche of consumers who feel more altruistic with their shopping decisions. While they put on their brand new shoes, they know that a similar pair of shoes will be given to someone who is in need, however this model raises some of dynamic questions:

Is this really a long term solution?
Donations can be of use in times of disasters or when the apparatus of markets don’t function anymore. However, a means of supporting communities through donations is a major source of deadweight loss. In small economies, donated shoes can and will put local shoemakers out of business.

Is the B1G1 model sustainable?
B1G1 models are marketing themselves as the pioneers of supporting causes for the lesser privileged thus making them subject to the market activity of some remote and otherwise disconnected society. If the consumers are no longer in purchasing products made by B1G1 companies, the potential recipient of the free product gets hurt.

This sort of altruism that can be purchased at the sales terminal seems to only keep the underprivileged alive and does not better their overall condition.

Another company that maintains similar practice is the Seattle based coffee giant Starbucks.

A trip to one of their franchises is designed to make the customer feel warmer about their consumer habits. The price the customers pay isn’t just for a cup of coffee but it also includes what they’re buying into – coffee ethics. The intangible surplus of the coffee is the consumer’s satisfaction that they buy “coffees that are Fair Trade Certified. By doing this, they ensure that farmers receive a fair price for their hard work”. The idea that consumers can buy their redemption at a higher price is a vicious circle which packages altruism in consumption.

Acquired by Starbucks in 2005 for $8 million, Ethos Water came with a mission of “helping children get clean water.” With a price range of $1.80 to $2.00 in Canada, it stands to be one of the more overpriced bottle of water in the market today. For every bottle sold, 10 cents (5 cents in the US) are put in their Ethos Water Fund which, to date, has $7.4 million in its reserve.  Despite the donations at their end, the price of the water bottle, $1.70 to $1.90, still remains highest amongst its competitors. Such marketing practices have been likened to profiteering. A fund of $7.4 million represents only 0.37% of their total operating income in 2012. Something quite obvious just doesn’t seem to add up here.

What is intriguing is that massive advertisement costs are incurred to keep the consumer satisfied with the belief that the coffee that they have bought ‘into’ has served a higher purpose than just having provided them a caffeine fix.