The specialty food market continues to grow for ethically produced products. According to new research, products with socially responsible labels can be sold at a premium. “Socially Responsible Products: What Motivates Consumers to Pay a Premium” was authored by Leslie J. Verteramo Chiu, PhD, et. al. with the Charles H. Dyson School of Applied Economics and Management at Cornell University, and found that the motivation to pay a premium for such products is an expression of consumer concern for the well-being of those who grow the products.
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According to Verteramo Chiu, one of the goals of the study was to assess how producers of socially responsible products can optimize the intended effect of their work on consumers’ buying decisions. In other words, how does, if at all, a product’s label affect if and how much of a premium a consumer is willing to pay. The study used Fair Trade coffee produced in Guatemala as its specialty product.
The market in the U.S. for specialty coffees such as Fair Trade continues to grow. According to Fair Trade USA, Fair Trade Certified Coffee Imports hit a record high in 2012 of 163 million pounds imported into North America. This represents an 18 percent increase over 2011 and helped farmers and workers earn an additional $32 million in community development programs. The USDA forecasts that the 2015/2016 world coffee production and trade will increase.
The study looked at three types of buying consumers: pure altruists who are motivated solely by their concern for the well-being of the recipients; paternalistic altruistic donors who care about the recipient and consider giving to be important but also like to know how the money is spent and thus restrict how the donated money is spent; and warm-glow givers whose interest in giving is purely egotistical and do not care about the recipient.
The research used a sample of consumers aged 21 or older who drink coffee each day. The consumers were given $25 and asked to make bids on three different pounds of coffee. Sustainable Trade 10 (ST10) coffee included a premium of 90 percent of which was a cash transfer to the grower with the remaining 10 percent being allocated to a public education or healthcare project. Sustainable Trade 90 coffee (ST90) included a premium, but nearly the entire money was allocated to a public health and education project in the community with 10 percent in cash being given to a grower. Lastly, the third pound of coffee did not include a premium payable to the grower and/or the grower’s community but was still branded as an ethically produced product.
According to Verteramo Chiu, the results found that on average paternalistic altruists were willing to pay a price premium of $2.72 or 52.51 percent per pound for ST90. Verteramo Chiu says these same consumers are not willing to pay a premium for ST10 because they believe in assisting the communities but they do not believe the money should go directly to the grower.
Verteramo Chiu says altruists are willing to pay a price premium of $2.63 per pound of ST10 but they are only wanting to pay a small 10 percent premium for ST90 (42.53 percent) coffee because they believe the money should go to the grower who knows best how the money should be used.
The study found that warm-glow consumers pay a price premium of $1.46 for both ST90 and ST10 but they aren’t concerned about who or how the money is spent. Verteramo Chiu says these are the consumers who follow trends and want to impress others. “When a warm glow purchases a product, he is buying it for his own welfare,” he says. “However, when a paternalistic altruist purchases a product, she cares about the welfare of the community while an altruist cares about the welfare of the grower.”
These are important distinctions, stresses Verteramo Chiu, for the company who produces the product. “Marketers need to first understand who they are targeting and then change the product’s label to meet the buyer’s desires,” he explains. For instance, if a company is targeting paternalistic altruists, then the product label must talk about the community projects that will be supported by the donation to secure the sale.
Interestingly, when asked if an ethically produced, organic labeled product would trump all, Verteramo Chiu says there is no correlation between the two but his study did not focus on this element. However, he says research around a possible correlation would be relevant.
Going forward Verteramo Chiu is heading to South America to see if the donations allocated from the purchases of ethically produced products are having the intended effect on growers and their communities. If not, he will ensure buyers know the truth.