Kearney study: Sustainable products are too expensive

Sustainable items cost on average 75 to 85 percent more than conventional products, as Kearney investigated in the study "Why today's pricing is sabotaging sustainability". The highest markups of up to 220 percent are found in fashion, beauty and healthcare. Baby food and energy have the lowest additional costs at around 20 percent.

Overpriced prices

"Sustainable products often cost much more than consumers are willing to pay. That doesn't have to be the case," says Carsten Gerhardt, partner and sustainability expert at management consultancy Kearney. "The reason lies in conventional pricing. If brand owners and retailers were guided by the actual costs incurred and rethought their conventional pricing, they could increase their sales and score points with the competition."

Fresh foods such as organic tomatoes have a lower additional price than processed products such as organic canned tomatoes. Various studies show that these price premiums are exorbitantly higher than the premiums that customers are willing to pay. According to these studies, around 70 percent of all consumers would spend up to ten percent more for sustainable products, 15 percent even 30 percent, and the remaining 15 percent would accept even higher markups.

"We can assume that a sustainability surcharge of ten percent would be well received in the mass market," Gerhardt says. The study also shows that consumers' willingness to pay more for sustainable products has grown across all regions, income levels and categories. While 66 percent accepted a moderate surcharge in 2015, the figure is now 80 percent.

True additional costs arise in production

Gerhardt explains the exorbitantly high price premiums of sustainable products with conventional pricing by brand owners and retailers. The true additional costs for sustainability are incurred at the beginning of the value chain, especially in production. However, they account for only a small portion of the final price, often in the narrow range of ten percent. Beyond the increased production costs, there are also certification surcharges for eco-labels and volume surcharges because only smaller quantities are produced.

The costs for certifications are relatively low at around five percent of the markups. By contrast, the largest share of the required additional price, up to 80 percent for non-food products and 70 percent for food products, is accounted for by allocated overhead costs as well as branding and the relative profit margins of brand owners and wholesalers and retailers.

Consequently, the largest additional cost for sustainability comes from steps that have no or very little impact on sustainability, while the part of the value chain that has the greatest impact on the sustainability of the items, usually production, has the smallest share of the final product cost.

Gerhardt: "Brand owners as well as retailers along the value chain could calculate the surcharges for sustainable products in such a way that they would be accepted by more consumers. With a ten percent price surcharge, the additional costs for sustainable production would be covered and the final price would not multiply as it does today. This would benefit not only customers and businesses, but also the environment."

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