Green, greener or brown: choosing the right color of the product

Abstract

There does not exist a one-size-fits-all green product strategy in green market, and formulating a strategy that aligns a company’s economic and environmental goals is no small feat. In this paper we provide insights into a firm’s green product strategy choice with a focus on two alternative strategies: Greening-Up and Greening-Out. In doing so, we incorporate two important characteristics of the customer market where there are substantial numbers of customers who are potentially receptive to a green appeal: (1) Customer market is divided into three distinct and mutually exclusive segments based on large-scale surveys and interviews conducted to measure both customers’ willingness-to-pay for products with environmental attribute(s) and their propensity to buy these products; and (2) We factor in the findings of the most recent market behavior studies that even the customers that demonstrate the least environmental responsibility of all the segments can buy green products for non-environmental reasons. The contributions and findings of our work are as follows. First, we characterize the market- and product-related factors a firm should act on for a successful execution of green product strategies. Second, on the basis of customer choice data available, we assess the strategic fit of distinct pricing options under each strategy choice with the objective(s) of a firm. Third, we explore the extent to which a green product strategy creates higher environmental benefits while providing economic payoffs to a firm. In contrast to prevailing view, we show that greening up an existing brown product is not necessarily better at reducing the environmental impact of a firm than designing a new green product. We observe that responsiveness of the least environmentally conscious customers to environmental attributes added into a brown product sets one of the two major constraints on the environmental performance of Greening-Up strategy. We also observe that there does not exist a strict dichotomy between having a better economic performance and achieving a higher environmental performance, and a firm can achieve both goals simultaneously, even if it means leaving out serving some of the customers targeted by the firm’s existing brown product.

Appendices

Appendices

1.1 Appendix 1: Proof of Proposition 1

Under the Greening-Off strategy, the firm is indifferent between the two pricing options if and only if ${{\varPi }_1^{i }}^*$ given in (7) is equal to ${{\varPi }_1^{ii }}^*$ given in (10). Solving ${{\varPi }_1^{i }}^*={{\varPi }_1^{ii }}^*$ for $\theta$ shows that this equality holds as long as $\theta$ is equal to $\sqrt{1-\left( \frac{e_1M_1r_G + e_2M_2\left( r_G+\delta \right) }{e_1M_1+e_2M_2}\right) }$, denoted by $\theta _A$. The proof follows. $\square$

1.2 Appendix 2: Proof of Proposition 2

Under the Greening-Out strategy, the firm is indifferent between the two pricing options if and only if ${{\varPi }_2^{i }}^*$ given in (14) is equal to ${{\varPi }_2^{ii }}^*$ given in (17). Solving ${{\varPi }_2^{i }}^*={{\varPi }_2^{ii }}^*$ for $\theta$ shows that this equality holds as long as $\theta$ is equal to $1- \sqrt{1-\left( \frac{e_1M_1r_T + e_2M_2\left( r_T-\delta \right) }{e_1M_1+e_2M_2}\right) }$, denoted by $\theta _B$. The proof follows. $\square$

1.3 Appendix 3: Proof of Proposition 3

Note that the solution to the problem stated above is feasible (i.e., both $q_{b3}$ and $q_{e3}$ are non-negative), if and only if $1 \le \frac{v_e}{\theta v_b} \le 1+\frac{F}{c_u\hat{x}}$. Since $x_1 > x_2$, we know that: ($a$) ${{\varPi }_3^{ii }}^* (\hat{x}=x_1) > {{\varPi }_3^{ii }}^* (\hat{x}=x_2)$; and ($b$) $\frac{F}{c_ux_1} < \frac{F}{c_ux_2}$. Therefore, when $1 \le \frac{v_e}{\theta v_b} \le 1+\frac{F}{c_ux_1}$, it is optimal to cover all market segments, while the only possibility for the firm is to cover the Fence-Sitters and Greens market segments when $1+\frac{F}{c_ux_1} < \frac{v_e}{\theta v_b} \le 1+\frac{F}{c_ux_2}$. $\square$

1.4 Appendix 4: Proof of Proposition 4

Note that the solution to the problem stated above is feasible (i.e., both $q_{b3}$ and $q_{e3}$ are non-negative), if and only if $1 \le \frac{v_e}{\theta v_b} \le 1+\frac{F}{c_u\hat{y}}$. Since $x_1 > x_3$, we know that: ($a$) ${{\varPi }_3^{iii }}^* (\hat{x}=x_1) > {{\varPi }_3^{iii }}^* (\hat{x}=x_3)$; and (b) $\frac{F}{c_ux_1} < \frac{F}{c_ux_3}$. Therefore, when $1 \le \frac{v_e}{\theta v_b} \le 1+\frac{F}{c_ux_1}$, it is optimal to cover all market segments, while the only possibility for the firm is to cover the Traditionals and Fence-Sitters market segments when $1+\frac{F}{c_ux_1} < \frac{v_e}{\theta v_b} \le 1+\frac{F}{c_ux_3}$. $\square$

1.5 Appendix 5: Proof of Proposition 5

When $\theta \le v_e/v_b < 1$, the second pricing strategy is the only feasible (i.e., both $q_{b3}$ and $q_{e3}$ are non-negative) and so the optimal option. When $1 \le v_e/v_b < 1/\left( 1-\theta \right)$, the first and second pricing strategies become feasible. In this case, the first pricing option dominates the second one only if ${{\varPi }_3^{i}}^* > {{\varPi }_3^{ii}}^*$. On the basis of Proposition 3, comparison of the expressions provided in Eqs. (22) and (26) yields the necessary condition for the above inequality to hold. Finally, when $v_e/v_b \ge 1/\left( 1-\theta \right)$, all three pricing options are feasible. In this case, comparing ${{\varPi }_3^{i}}^*$ separately with ${{\varPi }_3^{ii}}^*$ and ${{\varPi }_3^{iii}}^*$ shows that it is always dominated by these two pricing options. Then, in order to determine under what conditions ${{\varPi }_3^{ii}}^*$ is greater than ${{\varPi }_3^{iii}}^*$, we compare the respective expressions provided in Eqs. (26) and (30), and on the basis of Proposition 4, we obtain the necessary condition provided. $\square$

1.6 Appendix 6: Proof of Proposition 6

When $\theta =0$, the total number of pricing options under three strategies reduces to four possibilities. Under the Greening-Off strategy, the only option is to set $p=v_bq_b$ in which case only Traditionals and Fence-Sitters customers are completely served. Under the Greening-Out strategy, the only pricing option is to set $p=v_eq_e$, allowing the firm to cover all segments completely. Under the Greening-Up strategy, there are two options available: $p=v_bq_b+v_eq_e$ and $p=v_eq_e$. In the former case, only Traditionals and Fence-Sitters customers are served entirely, whereas all segments are completely covered in the latter case. Based on these options, we re-solve the firm’s maximization problem, and obtain the optimal profits for each option by using the parameter settings given in Sect. 5.

$$\begin{aligned} \pi _1^i&= (0.27)v_b^2\end{aligned}$$

(33)

$$\begin{aligned} \pi _2^{ii}&= (0.26)v_e^2-N\end{aligned}$$

(34)

$$\begin{aligned} \pi _3^{i}&= (0.18)v_b^2+\frac{(0.29)\left( v_e-v_b\right) ^2}{F}\end{aligned}$$

(35)

$$\begin{aligned} \pi _3^{ii}&= \frac{(4.28)v_e^2}{12.42+4F} \end{aligned}$$

(36)

Mutual comparison of these expressions leads to the respective dominance relationships provided in Proposition 6. $\square$

1.7 Appendix 7: Proof of Proposition 7

When $\theta =1$, the total number of pricing options under three strategies reduces to four possibilities. Under the Greening-Off strategy, the only option is to set $p=v_bq_b$ and completely cover all segments. Under the Greening-Out strategy, the only pricing option is to set $p=v_eq_e$, allowing the firm to serve only Fence-Sitters and Greens customers completely. Under the Greening-Up strategy, there are two options available: $p=v_bq_b+v_eq_e$ and $p=v_bq_b$. In the former case, only Fence-Sitters and Greens customers are served entirely, whereas all segments are completely covered in the latter case. Based on these options, we re-solve the firm’s maximization problem, and obtain the optimal profits for each option by using the parameter settings given in Sect. 5.

$$\begin{aligned}&\displaystyle \pi _1^{ii} = (0.52)v_b^2\end{aligned}$$

(37)

$$\begin{aligned}&\displaystyle \pi _2^{i} = (0.23)v_e^2-N\end{aligned}$$

(38)

$$\begin{aligned}&\displaystyle \pi _3^{i} = (0.31)v_b^2+\frac{(0.87)\left( v_e-v_b\right) ^2}{F}\end{aligned}$$

(39)

$$\begin{aligned}&\displaystyle \pi _3^{iii} = (0.35)v_b^2 \end{aligned}$$

(40)

Mutual comparison of these expressions leads to the respective dominance relationships provided in Proposition 7. $\square$

1.8 Appendix 8: Proof of Proposition 8

Based on the environmental qualities provided in Table 4, the aggregate environmental qualities supplied under two pricing options of the Greening-Out strategy are equal if and only if $\theta =0.10$. Then, when $\theta \le 0.10$, it is better for the environment to target the green product at all market segments. Otherwise, targeting the product at Fence-Sitters and Greens segment customers yields higher overall environmental quality. To sum up,

$$\begin{aligned} TEQ _2&=\left\{ \begin{array}{l@{\quad }l} (0.52)(1-\theta )v_e, &{} \hbox {if }\theta \le 0.10,\\ (0.47)v_e, &{} \text{ else }. \end{array}\right. \end{aligned}$$

(41)

Regarding the Greening-Up strategy, as long as $v_e/v_b > \theta$, setting the price of the greened-up product according to Greens segment customers’ product valuation (and targeting all market segments) always results in more aggregate environmental quality than other two pricing options, in which case

$$\begin{aligned} TEQ _3 = (2.15)\left( v_e-\theta v_b\right) /F. \end{aligned}$$

(42)

Combining the conditions and expressions given above yields the proposition and the proof follows. $\square$