This article is about something really simple, and yet so complex: setting a price.
A puzzling element of the current discussions about global warming is how often carbon neutrality seems to have become yet another marketing tool.
And this is a good starting point to discuss about prices and corporate social responsibility.
How do you differentiate your company?
By finding a new creative way to announce how your company is becoming carbon-neutral.
The same happened for other initiatives, all under the “corporate social responsibility” banner.
Introduction: a reminder of why being the first matters
If everybody is doing the same “carbon off-setting”, the additional visibility that you get by each additional penny spent in communicating about what you are doing decreases- you cease to be unique.
Beyond a certain point, it is wiped out, and unless your audience knows you already- it is just background noise, filtered out.
And this is a reason why when I was supporting few startups in Italy I advised them to avoid using advertisement on magazines- for the time being.
With their budget, they could buy once in a while just what in Italian is called a “quadrotto” (I learned about advertisement formats when I tagged along with my father to check advertisement on a newspaper and then radio and TV, and the pricing aspect while doing politics in high school).
And jumping on the carbon band-wagon after others is not a differentiator: nowadays, it is just part of being on the market with a visible brand.
But, if you are a company, it is becoming increasingly a nuisance and distraction: so many initiatives that are more about how your company is perceived, than anything that you actually deliver.
In the XXI century, with so many unofficial channels where unsatisfied customers can vent and share and relaunch their frustration, most companies are lucky if they have a handful of “first”, when it comes to differentiating themselves in the “good corporate citizenship” arena.
Once in a while, somebody makes new ideas fly, instead of following others.
I am quite sceptical about most of the current initiatives on “carbon neutrality”: in an increasing number of cases, it sounds just as yet another excuse to increase the prices in industries where usually increasing the prices at will is either not advisable (due to competition) or not possible (regulations, etc).
It is probably the concept of “price” that needs to be re-invented, to become part of corporate social responsibility.
A social definition of price
Probably I am not the only one who noticed that, over the last few WTO “rounds” and G7/G8/G20 meetings, there has been an increasing global convergence on accepting the idea that some issues are better solved through co-competition (see also this article that I published in June 2009 on cooperative systemic risk management).
Few days ago, I was reading an article on El Pais about the export of solar panels.
There was an interesting comment from the industry (for me, “the industry” means both producers and installers at the other side of the planet- i.e. from R&D up to the customer): when you are exporting solar panels, you are actually exporting energy.
The meaning was probably “means to produce energy”- comparing solar panels to oil.
But it inspired another consideration: whatever you pay, is linked more to the value that you perceive than to the real costs involved in producing the product.
Somebody would say: but we are already paying taxes and so on.
Yes. And no.
Because the taxes are really paid in the destination country by the final customer who cannot “pass it over” to the next one in the supply chain.
It is the same approach of the value added tax (called sales tax or under various other names in other countries).
But what if you produce in the US biscuits using flour coming from a European country- to re-export them again to the same country that provided the flour?
Certainly, the price you pay includes current costs- at the suppliers’ side.
And, certainly, the pricing for the flour producers included their energy costs.
But what if demand increases, and instead of, say, “bio” production, you need intensive production in a country with limited topsoil and water resources?
Eventually, it depends on your negotiating power: if you have none, you simply increase flour production to satisfy your non-local customers, until your land is unable to provide.
And then, the biscuits producer can shift production to another country
The point being: pricing currently is mainly focused on “now” not on long-term sustainability.
For all the discussion about “carbon offsetting”, we saw some cases where a disaster in a plant in a far away town and country resulted in payments at a fraction of what would have been paid in the country of the final producer.
Provisioning
I remember when I was doing in November 1989 my first feasibility study for an insurance project that I was supposed to manager from January 1990 (kick-off meeting: January 15th).
Well, I actually had resigned on October 15th, and ended on… January 15th, but I was forbidden from saying anything to the customer- another example of asymmetric knowledge between the customers and the suppliers.
I had time to study their data to produce a decent architectural outline for the DSS and reporting model.
And to prepare, I had to study how pricing for insurance was based on an assessment of the risk vs. premium- and the “risk” side included potential loss on income, related to your studies, background, etc.
And the typical income in your country for your profession, plus your life expectancy.
In the case of a disaster (say, an accidental release of chemical products, or an oil spill), all this focuses on the individuals’ income expectancy and income loss, aggregated for the larger population, by applying some further analysis to identify the potential incidence of additional long-term ailments.
As shown by the current issue with the oil spill in the US, companies are able to set prices including some risk- but often do not provision for long-term risks derived by their operations.
The real production costs
Everybody in the US is complaining about the cost of the oil spill cleanup- but they are forgetting that, whatever the cost, their country has the financial, technical, human resources to cope with the disaster.
In previous disasters, some armchair economists advocated paying the same damages as would have been paid in the US- an unreasonable request, by any standard, unless you shift from “power of purchase parity” to “income equality”.
But what if the country where the disaster happens lacks the resources (from cleanup to life-long support for new chronic patients) to cope with the aftermath?
Few days on the frontpage of the main news outlets worldwide, and then it is gone.
I chose the Bhopal failure (as you have probably guessed) and Gulf oil spill examples as they are certainly more memorable.
I rather say “failure” than “disaster”- as in most other so-called “disasters” related to human activities, in the end was a series of human decisions that produces the unintended results.
But there are countless of other past, ongoing, and possible future cases where the price paid by the end consumer does not cover the indirect costs generated by the activities required to produce the product.
Erosion of topsoil, excessive use of water resources, pollution generated by untreated waste water (hence, cheaper production costs), long-term chronical diseases of workers operating without the usual safeguards (again, further lowering production costs): these are just some of the most common side-effects.
If prices were to mirror not just the immediate (or “instantaneous”) costs, but also the piling up of related long-term costs (including the side-effect of dismantling in poorer countries by hand electronics products containing toxic material), we would probably have a less affluent society for the top 1/6 of the world population, but we would reduce the potential long-term risks of social unrest.
Reading about development, you often can see commentary stating: what if the other 5/6 of the world population want to obtain the same level of consumption that the rich West has now?
That maybe a longer-term concern.
What is often ignored, albeit already quite visible since at least the 1980s (illegal economic immigration, quarrels on water access and land use), is that we are actually shuffling our labour-intensive activities and the associated waste under the rug of developing countries.
What if countries lose the ability to sustain the health and mere existence of their own citizens, and you will move from the current immigration wave to a more sustained exodus?
Externalities-based pricing
If pricing were to shift from a “cost-based” to an externalities-based” approach, labour-intensive production would still keep shifting to the country where the costs are lower, but where those costs are sustainable.
Let’s be frank: eventually, any low-income country aspires to cease being a low-income country.
Any production shifted there just because the salaries are lower and regulations are more “flexible”, would eventually shift elsewhere.
Therefore, it would make sense to provision for repairing the damages of the initial “Far West Production”- but none of the countries involved has the negotiating power to do so.
I wrote “none”- intending both the buyer and the seller: as both have to operated under the current “cost based” pricing.
A company who were to follow a different approach would now find itself in an impossible predicament, priced-out of the market.
Also the “fair trade” companies that I analysed (and I invite more people to read beyond the label: some companies are simply using it as a marketing ploy) do not steer away from the “cost-pricing” model: they just add a “premium” for their suppliers in low-income countries.
If you believe in the “open market” approach (yes, sometimes it sounds more like a religion than an economic development policy), eventually, there will be no more low-income countries, but only different levels of income.
Therefore our production methods will naturally need to evolve accordingly, toward a less resource- and labour-intensive production model.
For the time being, the cost of alternative production models is too high (e.g. the reported dismantling of some robots when a production line in the automotive sector was moved from France to China), but introducing in corporate social responsibility also the concept of “long-term costs” would make those alternative models a viable alternative.
Years ago, the OECD produced the “Guidelines for Multinational Enterprises”, while the UN created the “Principles for Responsible Investment”.
Laudable initiatives- but how many companies and countries follow them (being a signatory does not imply really enforcing their application).
What if we do nothing? Well, we are simply keep shifting the costs and consequences to future generations, as it was done for the post-WWII development.
Tags: corporate social responsibility, cost, development, externality, fair, guidelines, oecd, pri, price, pricing, trade, un