Price premiums in the mist.

Abstract

Consumers shopping at the Oregon State University (OSU) and Auburn University (AU) bookstores were offered a choice between ecolabeled and non-ecolabeled wood pencils. Aside from the presence or absence of an ecolabel, the pencils were identical in all other respects. Sales

of each pencil type were tracked during a number of pricing conditions: prices equal for each pencil type, a 20 percent premium on ecolabeled pencils, and a 100 percent ecolabeled premium (at OSU only). Many forest certification proponents claim that ecolabels are associated with increased sales, price premiums, or both. To begin clearing the "mist" shrouding such claims, comparisons were made between the quantity sold of each pencil type under each pricing condition. Our results show that OSU and AU pencil consumers were largely indifferent to the presence of an ecolabel. However, as the price premium "gorilla" gets bigger, more and more consumers abandoned their indifference and purchased the cheaper non-ecolabeled pencils.

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Developing a deeper understanding of ecolabeled forest product marketing requires investigating consumer response to a variety of ecolabeled products and price premiums. Thus, our objective was to begin clearing the "mist" shrouding forest certification marketing claims so that we could better understand what effect ecolabels and price premiums (gorillas) have on consumer behavior.

Third-party forest management certification is an independent evaluation of an organization's forest management practices against criteria that have been judged to represent sound forestry. When third-party-certified forests are harvested, the resulting products may be tracked through the manufacturing process using another certification system called chain-of-custody. Finished forest products certified under both forest management and chain-of-custody programs may bear an ecolabel, which is an on-product or on-packaging label that allows consumers to differentiate the product from similar products that do not originate from certified forests and are not tracked through the manufacturing process with chain-of-custody certification.

The development of forest management certification, chain-of-custody certification, and ecolabeling is based on the notion that given a choice, consumers would prefer (or pay more for) ecolabeled wood products. If either were true, then forest industry firms would have a market-based incentive for independently verified, good forest management. Since the introduction of forest certification about 10 years ago. contradictory anecdotal information can be found about its impact on marketing forest products (e.g., FSC 2004, Rebhahn 2004). Thus, researchers have been busy trying to clear the resulting "mist."

Typically, researchers have measured consumer attitudes, beliefs, values, and willingness-to-pay more for ecolabeled forest products (see Anderson and Hansen 2004 for a discussion and listing of this research stream, or for a more extensive review see Smith 1999). These studies have generally shown that most consumers hold positive attitudes toward forest certification and express a willingness-to-pay more for certified products. However, attitudes and expressed intentions don't always match actual behavior. Thus, in contrast to measuring attitudes, beliefs, values, and willingness-to-pay with respect to ecolabeled forest products, researchers have begun observing actual consumer behavior (Gomon and Smith 2003, Anderson and Hansen 2004). In the Anderson and Hansen study, consumers were offered a choice between virtually identical ecolabeled and non-ecolabeled plywood products. The research revealed that when prices were equal between both products, study participants purchased more ecolabeled product by about a 2:1 ratio. However, when the price of the ecolabeled product was raised by 2 percent (on a total price of about $21), the cheaper, non-ecolabeled product outsold the ecolabeled product by a 1.7:1 ratio.

[FIGURE 1 OMITTED]

Methods

The present study was carried out at the Auburn University (AU) and Oregon State University (OSU) book stores using similar methods to those of Anderson and Hansen (2004). Consumers shopping in the OSU and AU bookstores were offered side-by-side containers filled with wood pencils (Fig. 1). The pencils in each container were identical except that those in one container bore the Rainforest Alliance ecolabel, a labeling program of the Forest Stewardship Council, which certifies that the wood used to make the pencil comes from a well-managed forest. The pencils in the other container were made from the same raw material and came from the same manufacturer, but bore no ecolabel. Also note from Figure 1 that a hang tag was attached to each container. The hang tag on the ecolabeled pencil container featured the Rainforest Alliance ecolabel, manufacturer's name, pencil lead type, price, and text explaining that the presence of the ecolabel assures consumers that the wood used to make the pencil comes from a well-managed forest. The hang tag on the non-ecolabeled container featured only the manufacturer's name, pencil lead type, and price. At OSU one additional treatment was added in which the size of the hang tags was increased.

Pencil sales quantities from each container were monitored under three pricing treatments. Initially the price per pencil in each container was equal. During the second treatment, the price per pencil in the ecolabeled container was 20 percent greater than the non-ecolabeled pencils. In the third treatment, which was applied only at OSU, the pencils in the ecolabeled container were double the price of the non-ecolabeled pencils. Systematically raising the ecolabeled premium allowed testing of consumers' sensitivity to an ecolabeled price premium.

Note that there was no 100 percent price premium treatment at the AU bookstore because the store manager feared that the bookstore's customers would notice high prices on pencils, which might lead to a perception of high prices on all products in the bookstore. In this case, the manager was sensitive to pricing issues because many students assert that course textbooks are overpriced. Such sensitivities among retailers are worth noting, because it may decrease a forest products firm's ability to achieve a price premium for certified products.

During each treatment, the quantity sold of each pencil type was recorded. At OSU, sales quantities were recorded about once per week via physical inventory. At AU, the pencils in each container had unique SKU (stocking keeping unit) numbers, which allowed sales tracking via the bookstore's computerized inventory system. Finally, to test whether the presence of an ecolabel was associated with increased sales, comparisons were made between the quantity sold from each container for each pricing treatment.

A post-purchase survey was administered at OSU. Cashiers asked pencil purchasers to complete a brief questionnaire regarding their reasons for purchasing either pericil type. The survey was administered for only a brief portion of the prices equal and 20 percent ecolabeled premium pricing treatments. The responses represent about 52 percent (prices equal treatment) and 41 percent (20% ecolabeled premium treatment) of the consumers that purchased pencils during the time the survey was in place.

Results

Table 1 displays the number of pencils sold under each price condition at the OSU bookstore. Table 2 displays results from the Auburn bookstore.

Discussion

Tables 1 and 2 show that when the price between containers was equal and when the ecolabeled pencils were priced at a 20 percent premium, consumers were indifferent about which pencil type they purchased. This observation is true at both locations. Apparently at this level, a price premium gorilla is only a cute baby that rates little attention from consumers.

The apparent indifference has a number of possible explanations. First, despite the hang tags and logo on the pencils, many consumers may not have noticed they had a choice. This explanation is supported by the observations of sales clerks and store managers at both Auburn and OSU. It is also supported by the results from a post-purchase questionnaire conducted in the OSU bookstore (Table 3), which shows that 19/36 or about 53 percent of the respondents indicated they weren't aware they had a choice.

Of those consumers who did notice there were two types of pencils for sale, perhaps they were not willing to invest the time and effort in making a choice. This phenomenon can be explained via the marketing literature (where consumer behavior is acknowledged as not completely rational) with the consumer involvement construct, which was first developed by Krugman (1965). It holds that consumer involvement is the primary determinant of consumer behavior and is characterized as the degree to which consumers are mentally engaged in the consumption process (Broderick and Miller 2001). High involvement refers to high personal relevance for a particular purchase, e.g., a car or a home, while low-involvement equates with low personal relevance, e.g., a wood pencil. From the economic literature perspective (where consumer behavior is thought to be completely rational) the observation is explained by elasticity of demand, which is the percentage change in the quantity demanded divided by the percentage change in the price of that product. A key determinant of elasticity of demand is the importance of the product in the consumer's total budget (Ekelund and Tollison 2000). In this case, demand is inelastic and consumers are more likely to act "green" because a 3, 5, or 20 cent premium is not a large portion of most consumers' budget.

Even making the size of the informational hang card much larger had no effect on sales (Table 4). Because the initial OSU Bookstore survey results showed that many customers did not notice a difference between the two pencil containers, the size of the hang tag was increased from 2.5 by 3.5 inches to 4.0 by 7.0 inches so that theoretically the difference between pencils was more apparent. The price per pencil in each container was equal during this treatment.

Table 1 shows that the purchasing pattern changed markedly at OSU when the ecolabeled pencils were double the price of non-ecolabeled pencils. Clearly this price difference affected purchase patterns. Now the mystical price premium gorilla has grown to the point that most consumers no longer ignore it, even for a relatively low-priced item. An obvious explanation is that consumers were not willing to pay double for the intangible benefit of supporting good forest management. This explanation is also supported by the post-purchase questionnaire results (Table 3). Note that three respondents claimed their reason for purchasing a non-ecolabeled pencil during the 20 percent ecolabeled premium pricing treatment was that they did not want to pay more.

Despite the dramatic shift in purchase behavior when there is a large price premium, about 30 percent of the sales under this pricing condition were to consumers willing to pay twice as much for a pencil with an ecolabel than an identical pencil without a label. This suggests that at least some consumers were still willing to pay the extra amount to promote good forest management. This idea is also supported by the results displayed in Table 3, which shows that 11/36 or about 31 percent of respondents indicated they purchased the ecolabeled pencils because they wanted to promote good forest management.

Conclusions

Much environmental policy is driven by claims about the values placed on environmental amenities and attributes. As revealed by actual purchase patterns, however, individuals' stated willingness-to-pay and their demonstrated willingness-to-pay for those same environmental amenities may not be consistent. This inconsistency is explained by the basic economic principle of an inverse relationship between the price of a good (any good) and quantity demanded of that good. In this case, it suggests that when individuals are required to pay real money for environmental amenities claimed to be highly valued, his or her actual consumption of those amenities falls as the cost increases. This implies what we have termed a "price premium in the mist" behavior pattern. When individuals do not see the price premium gorilla through the environmental rhetoric mist, he or she reacts to the mist; however, when the price premium gorilla suddenly appears, he or she is most likely to react to the gorilla, not the mist.

Some ecolabeled wood products (like pencils) are low-involvement, price inelastic purchases for most consumers. This means that consumers are not willing to invest the time and effort required to make an informed decision between ecolabeled and non-ecolabeled products, even when there is a slight price difference. For those consumers in our study who did make a conscious choice, it is likely that their behavior was "green" because it only cost them a few cents, even though the premium was relatively large as a percentage. However, as the size of the ecolabeled premium increased, even for this relatively inexpensive item, a majority of consumers abandoned their indifference and purchased the cheaper pencil. Going back to our price premium--gorilla analogy, the larger the gorilla the more attention consumers give it. Still, some consumers apparently are not afraid of large gorillas because those consumers were willing to pay sizable premiums for ecolabeled forest products.

Further research could profile the actionable demographic and psychographic characteristics of the segment that is willing to pay a premium for ecolabeled products. Finally, retailers may resist pricing ecolabeled products at a premium for fear of price gouging perceptions. Retailers may believe that such perceptions among their consumers could negatively impact sales on an array of merchandise, and ultimately profit.

Table 1. -- Sales totals for ecolabled and non-ecolabeled pencils at the
OSU bookstore under three price conditions.

            Price                   Amount sold
Ecolabeled      Non-ecolabeled  Ecolabeled   Non-ecolabeled  p-value (a)
         ($)

0.20            0.20            834          767              0.094
0.25            0.20            284          275              0.703
0.40            0.20            125          285             <0.001

(a) The p-values reported are from a Chi-square goodness of fit test.

Table 2. -- Sales totals for ecolabled and non-ecolabeled pencils at the
Auburn bookstore under two price conditions.

         Price                  Amount sold
Ecolabeled  Non-ecolabeled  Ecolabeled  Non-ecolabeled  p-value (a)
         ($)

0.14        0.14            11,296      11,488          0.203
0.17        0.14             3,083       2,902          0.019

(a) The p-values reported are from a Chi-square goodness of fit test.
The p-value in the bottom row is significant. We believe the test was
statistically significant because the large number of observations gave
the test great discriminatory power. However, the difference between
sales of 3,083 and 2,902 is not practically significant.

Table 3. -- Reason given for choosing either pencil (numbers represent
the number of times a response was given).

                                            No. of
                                            responses  No. of
                                            during     responses
                                            prices     during 20%
Reason for buying one or the other pencil:  equal      premium     Total

I didn't know there was a difference        12          7          19
I liked the look/style of the ecolabel
  logo                                       3          0           3
I liked the look/style of the plain pencil   0          0           0
I wanted to promote sustainable forest
  management                                 7          4          11
I don't believe environmental logos are
  credible                                   0          0           0
I don't believe sustainable forest
  management is an important issue           0          0           0
I did not want to pay more                   0          3           3
Total                                       22         14          36

Table 4. -- Sales totals for ecolabled and non-ecolabeled pencils at the
OSU bookstore using a larger hang tag.

         Price                   Amount sold
Ecolabeled  Non-ecolabeled  Ecolabeled  Non-ecolabeled  p-value
       ($)

0.20        0.20            179         191             0.532

Literature cited

Anderson, R.C. and E.N. Hansen. 2004. Determining consumer preferences for ecolabeled forest products: An experimental approach. J. of Forestry 102(4):28-32.

Broderick, A.J. and R.D. Miller. 1999. A theoretical and empirical exegesis of the consumer involvement construct: The psychology of the food shopper. J. of Marketing Theory and Practice 7(4):97-109.

Ekelund, Jr., R.B. and R.D. Tollison. 2000 Economics: Private Markets and Public Choice. 6th ed. Addison Wesley, New York. p. 126.

Forest Stewardship Council (FSC). 2004. The Home Depot and Tembec team up: FSC-certified lumber will be more widely available to customers. Forest Stewardship Council U.S. News and Views. January 2004. www.fscus.org/images/newsletters/FSCNews_january_2004.pdf

Gomon, S. and R.L. Smith. 2003. Purchase of certified wood products and consumer understanding of forest certification. Working paper. Virginia Tech. Center for Forest Prod. Marketing, Blacksburg, VA.

Krugman, H.E. 1965. The impact of television advertising: Learning without involvement. Public Opinion Quarterly Fall 29:349-356.

Rebhahn, P. 2004. Menominee Tribe sees little financial return on forestry certification efforts. Green Bay Press Gazette, June 7, 2004.

Smith, P.M. 1999. A review of studies on consumer attitudes towards forest products marketed with environmental, social and/or sustainability attributes. Food and Agriculture Organization of the United Nations, Rome, Italy.

Roy C. Anderson*

David N. Laband

Eric N. Hansen*

Christopher D. Knowles*

The authors are, respectively, Forest Products Marketing Specialist, Montana State Univ. Extension Forestry, 32 Campus Dr., MS 0606, Missoula, MT 59812; Professor Forest Economics, School of Forestry and Wildlife Sciences, Auburn Univ., 205 M. White Smith Hall, Auburn, AL 36849; Associate Professor/Extension Specialist and Graduate Research Assistant, Wood Science and Engineering, Oregon State Univ., 119 Richardson Hall, Corvallis, OR 97331. This paper was received for publication in June 2004. Article No. 9894.

*Forest Products Society Member.