The customer is right, about sustainability
Reflecting on the changing relationship between businesses and their customers
We’ve all heard the refrain ‘the customer is always right’ but it’s taking on new dimensions these days in the race to sustainability.
Over the last few years research and anecdotal experience has told us how consumers are dramatically changing their consumption habits to minimise waste and choose more environmentally conscious products.
We all know that younger generations in particular are more likely than ever before to boycott a company in the name of ethics. In one survey, 66% of all respondents, and 75% of millennial respondents, said they consider sustainability when making a purchase – a number that is sure to spike as Gen Z grows into their buying power.
And it seems the boardroom is hearing them. In the recent
UN Global Compact & Accenture CEO report 68% of CEOs cite customers as the most impactful stakeholder influencing their sustainability agenda.
Take a moment to let that sink in.
The world we live in is hugely interconnected, and, more than ever before, communicative. Consumers have the tools and platforms at their fingertips to communicate their expectations, criticisms, and praises directly to companies. This in itself is a powerful tool for individuals to engage with companies, however there is a more important factor here: consumers are able to communicate and engage with each other en masse. Whereas in the past unhappy customers would be forced to deal privately with the company to resolve any disputes with no real leverage, now customers are able to vent their frustrations online; coalescing other unhappy customers or even people totally unrelated to the issues being raised.
This can result in companies being publicly named and shamed in a previously impossible manner. This has obviously forced companies to take more responsibility for their products and services, as poor behaviour can result in huge backlash from the public at large.
There is also a flipside of this point. For companies who deeply care about engaging with their customers in a meaningful way, this dramatic increase in communication and interconnectedness allows them to really hear their customers and build a community around their brands. There are some incredibly successful companies whose primary success driver is their ability to build a community around themselves.
So this global communication revolution is acting as both an incentive and a warning-shot for companies. Shifting to consumer-led strategies is now an imperative for companies wishing to achieve sustainable growth and success.
Sustainable activities were shown to increase EBITDA (one of the most crucial metrics to assess business performance) by as much as 35% when compared to non-sustainable activities.
Welcome to politics
But it’s not just their own products or services that we’re expecting companies to level up these days.
After years of politicking despite growing fear over climate change many people have come to believe that companies bear as much responsibility for positive change as governments.
We no longer just expect our shoemaker to create a good, lasting and attractive trainer that makes us feel stylish. Today, we need a brand to take responsibility for how that end product – and all required components – came into being; how the waste they generate impacts the environment; whether the workers along the supply chain are being fairly treated; and to even challenge the constant push from brands that makes us feel like we always need more new stuff.
The fact is that corporations have a huge amount of sway and influence over countless stakeholders across their operations. Consumers know this and are increasingly voting with their wallets when it comes to encouraging responsible production.
Corporations are becoming aware of this, and that trend has prompted the creation of a new school of economic thought: “stakeholder capitalism”. Simply put ,stakeholder capitalism is a form of capitalism where companies seek long-term value creation by taking into account the needs of all of their stakeholders as well as society at large. Although this theory has existed for some time, first being introduced in the 1970s, it is in the 21st century that it is really starting to take hold.
This means that not only are corporations facing pressure from their customers to be more responsible, but an increasing number of business leaders are proactively transforming the way they approach responsibility across their operations.
In addition to this, a lot of businesses are realising that sustainable activities are outright good for business.
But it’s good business
Sustainability is expensive, right? It is something that businesses are forced to think about at the expense of financial performance. This was a commonly held view as recently as the 2010s. However, what we are now seeing is the emergence of data, reports, and insights that are categorically refuting this position.
In the same report, more than half of the roughly 2,600 CEOs interviewed said that they had gained a competitive advantage from setting science-based sustainability targets. This can be from a range of factors, such as efficiency-savings, marketability and customer growth, and even better revenue performance.
Financial consulting firm EY
released a report in 2021 stating “as stakeholders’ expectations focus more on sustainable development, companies must fully embrace this paradigm shift to create value.”
They also highlighted a number of compelling metrics demonstrating that sustainable companies are dramatically outperforming non-sustainable ones. Gross profit was 6% higher in sustainable companies, EBITDA 4% higher, and net profit a massive 6% higher. In addition, sustainable activities were shown to increase EBITDA (one of the most crucial metrics to assess business performance) by as much as 35% when compared to non-sustainable activities.
This report highlights something more than just shifting consumer demands - it represents a fundamental shift in business economic thinking. Sustainability is no longer an expensive afterthought, it has to be incorporated into the core of business strategy.
The most pressing challenge?
But barriers still remain to making this trend more commonplace, notably for our wallets. With skyrocketing expenses, 57% of consumers in the
2022 Deloitte sustainability survey said that we need to make sustainable options more affordable, and that finding was backed up by Which? who reported that two thirds of consumers often found ethical products too expensive.
This is perhaps the most pressing challenge. As we have seen, businesses are reacting to customer demands and expectations, and have begun to embrace more responsible methods of consumption in order to create value into the future. However, the second that consumer pressures begin to wane, the business case for sustainable operations begins to disappear.
And this does, at a glance, seem impossible to solve. With consumers having less money to spend, and sustainable products still having a price premium, where does this leave us for the future of responsible businesses?
It actually presents a huge commercial opportunity. If businesses are able to produce their products responsibly with a lower price premium then they will find themselves reaching a huge pool of nascent demand. In short, consumer demands are not changing, but their spending power may be impacted due to ongoing cost of living issues.
Although the journey may have peaks and valleys, this new paradigm of consumers demanding and expecting more responsible practices from businesses looks set to become the new norm. With climate and environmental issues looking to worsen over the coming demands, we expect to see consumers becoming even more engaged and voting with their wallets to support companies which are taking action.
