Commercial success is one of the largest accelerators of sustainability. When sustainable products reach commercial viability, scaling is no longer dependent on legislation, subsidies, or a benevolent consumer.
The bad news: the cost to produce many sustainable alternatives (also coined green premium) is currently higher than their counterpart.
The good news: many sustainable alternatives are reaching or are bound to reach a green premium of zero. Additionally, there are many actions businesses can take even when sustainable alternatives are not (yet) fully cost-competitive to scale up their products.
Here are 5 ways your organization can leverage business models and pricing to make your sustainable alternative more attractive, including examples from the Netherlands and beyond:
1. Sharing is caring: Pay-as-you-go models
An average car stands still for 95% of the time. A good amount of tools are used only once after purchase. Business models or platforms that promote sharing, such as GO sharing or Greenwheels can promote benefits for both customers and companies while operating sustainably due to a decrease in required production. Sharing models are not only applicable in consumer businesses but also in business-to-business. For example, Boels Rental provides specialized machinery to industrial players and Greener Power Solutions rents out batteries to event organizations.
There are ample benefits to pay-as-you-go sharing models. Customers who use these products incidentally often pay a lot less in sharing models than if they purchase the product, and they are typically unburdened from maintenance or product upgrades. At the same time, the margins earned over a product’s lifetime are typically far greater for companies. What’s more, they can access fully new customer bases that would typically have a more limited willingness to pay or different needs. Think for example about students that do not require owning a car or want to invest long-term in a washing machine.
2. Closing the loop: Subscription models
Similarly to the sharing economy, Subscription or as-a-service models focus on outcomes, not products, while the ownership remains at the manufacturer. The most famous examples are found in software and media, for example at Netflix and Spotify. However, physical products can also be employed as a subscription. A consumer example is MUD Jeans, which leases jeans to consumers who can choose to keep the jeans after a year or swap them, including free repairs. In business-to-business there are also many examples, from lights-as-a-service by Signify to robotics companies offering their automation solutions as a subscription, such as InVia.
The sustainability advantages of a subscription model on hardware are three-fold. First of all, the incentives to uphold a long lifetime for products are aligned for both the company and the user, as the company remains the owner of the product. This ensures an incentive for high-quality proactive and reactive maintenance. Second, if customers stop their subscription, products are typically refurbished and go back to the market (the reuse, redistribute/resell, and refurbish/repair part of the circularity loop). Finally, when products are end of life, because they remain in ownership of the company, it can close the loop by engaging in repurposing, recycling, or regenerating materials.
3. Lasting a lifetime: Resell, Repair, Refurbish
Even when products are not sold as a subscription, companies can set up business models that promote a longer lifetime of products (and thus less consumption), while also contributing to their revenue. Going back to the circularity loop, there are multiple options possible.
Firstly, by setting up resell platforms, companies can promote the redistribution of products before they become end-of-life. An example of this is the second-hand resell channel of Levi’s on their website. Secondly, companies can offer (typically in outsourced partnership) a network of repairs and collections. One such company is Amsterdam-based United Repair Centre, which conducts these repairs for the likes of Patagonia, Decathlon, and Lululemon. While being ecologically more conscious, they are also emphasizing the social dimension of ESG by employing refugees to conduct clothing repairs. Similarly, headphone company Repeat and mobile phone company Fairphone promote repairability by offering modular concepts with easy-to-replace parts. This ensures an added constant revenue stream on spares rather than just selling new products. Lastly, companies may promote taking back an old product for refurbishment to resell later. For example, this is becoming increasingly prevalent in the white goods industry.
4. Defending the premium: Higher pricing and value
For an array of products, a price premium to cover the additional costs may actually be defensible. Results from several market research studies suggest a range from 10 to 50% additional willingness to pay just for sustainability alone. These premiums often help to fully bridge the gap in variable costs. However, not all customers will be willing to pay the premium. Companies should know their target customer who cares about sustainability and be present in the right channels with the right marketing to boost engagement.
However, the most successful companies manage to intertwine their sustainable product ranges or brand with other value drivers to speak to consumers on multiple levels. Marcel’s Green Soap, a sustainable cleaning products brand, not only markets its products with natural ingredients as sustainable, but also safe for your house and own body. Sustainable fashion companies like Arc’Teryx and Salomon have succeeded in making their sustainable outdoor look into a fashion statement. Tony Chocolonely and Oatly are not only combating industry norms, but created great-tasting products marketed to consumers using novel tactics. Miele is using its image as a reliable, long-lasting brand to promote the positive effects these products have on resource consumption. Think about what synergies your company can employ to defend a higher price and value from sustainable products.
5. Bridging the gap: Lower green premium
Last but not least, companies should find a way to lower the green premium to produce sustainable alternatives down to zero, as that is when sustainable alternatives truly become competitive. Firstly, companies can relentlessly innovate on procurement, production, product, and distribution. Through innovation, solar technology has quickly reached this cost competitiveness threshold in the last years and plant-based meat should be able to get there pretty soon. Secondly, companies can use government schemes to reduce the green premium, such as subsidies and carbon credit systems to their advantage as much as possible.
Conclusion
In the pursuit of sustainability, commercial success can be one of the most important catalysts. The green premium poses a challenge, but actively developing models and strategies like the ones in this article can help businesses bridge the gap.
Which of these business models could make sense for your company? I’d love to hear your thoughts, so send me a message at tim@nlmtd.com to discuss!
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