Pay-As-You-Go Pays for the Environment

Pay-as-you-go (PAYG) is emerging as a winning consumption model for the environment. It does so in two ways. First, by charging for incremental use, PAYG discourages overconsumption often associated with flat rate pricing. Second, it incentivizes shared use of resources during peak periods in order to avoid excess investments in capacity that would otherwise be underutilized for much of the time.

In recent years, several PAYG models have emerged that are having a positive impact on the environment. For example, smart grid initiatives provide consumers with tiered pricing models that incentivize them to reduce or shift energy use during peak periods. Additionally, PAYG models in cloud computing allow consumers the flexibility to add computing capacity in real-time, while avoiding the need to overinvest in server capacity utilized only during peak periods.

This month, another consumption model got a big boost when the California Insurance Commission approved the launch of PAYG car insurance in the country’s largest car market. Beginning in February, 2011, California residents will be able to purchase insurance from State Farm and the Automobile Club of Southern California and pay based on how much – and how safely – they drive. The less they drive, the less they pay.

Such a model is enabled through the tracking of personal driving data. Consumers self-report miles driven (and validate periodically through inspection) or do so automatically through an active OnStar system or small telematics device that plugs into a diagnostic port under the dashboard. Insurance companies then effectively create personalized rates based on actual car use.

Potential benefits for the environment from PAYG are significant: The State of California estimates that subscribers may reduce miles driven by 10% or more, saving consumers money while reducing accidents, congestion and air pollution.

A wide variety of companies are now in a position to consider testing PAYG models with their customers, especially those that are price sensitive, tend to use a product less than the average or demand additional services during peak periods. While consumers may focus on saving money, the real benefits may be saved for the environment.

Getting Smart About Green Targeting

An Interview with Amy Hebard, Chief Research Officer and Founder, earthsense

 

Marketing green can be a challenge for even the most seasoned professional.  There are many reasons for this of course: consumer beliefs are still evolving; demand is not well established; and even where it is, purchase behavior tends to be inconsistent (e.g., the same consumer buys the hybrid and the SUV).

 

For green marketers to be successful, they must effectively and efficiently target their audience when and where consumers are most receptive to green messaging.  For marketers, this is no easy task. 

 

While green content sites or periodicals may seem like a natural fit, advertisers must remember that consumers come in all shades of green.  As such, focused periodicals may only reach “deep greens” which today represent only a fraction of the total population that express some level of interest in green.  Instead, marketers must target their audience in more mainstream channels.

 

Today, companies like earthsense are emerging to empower marketers to do just that. 

 

At its core, earthsense is a market research company focused on green consumers.  What differentiates earthsense, however, is the depth and breadth of it dataset regarding consumer attitudes, behaviors and demographics.  This dataset is based on both proprietary research as well as partner data sources.  For marketers, mining this dataset has the potential to uncover rich consumer insights that can help shape messaging, as well as guide marketing and media investments in a more targeted way.

 

Recently, I had the opportunity to speak with Amy Hebard, Chief Research Officer and Founder of earthsense.  We spoke about earthsense’s unique data set, consumer insights derived from the database and opportunities to leverage the data to more effectively target consumers, particularity via retail channels.  Here is what she had to say:

 

MG: Earthsense fields one of the largest surveys in the green space.  What makes your data unique?

 

AH: Targeting and finding the “green” consumer – whether we’re talking about “super greens” willing to pay a premium, mass market “greens” who want to be eco-friendly without an added charge, or “non-greens” who wouldn’t buy “green” products even if they cost less than standard prices – is an enormous challenge for many marketers today.  

 

When we started earthsense, we knew that we needed to take a fresh look at the resources available to us to solve this problem.  We decided to combine best-in-practice techniques of market research, database marketing and advanced geo-spatial analysis to provide new insights in this space.

 

First, our Eco-Insights survey is the largest by far in the US: we survey 60,000 US adults each year.  This gives us unprecedented capabilities to slice and dice our data for almost any demographic group of interest (e.g., high income earners, newlyweds, parents, baby boomers, college students, expectant moms, etc). 

 

Second, and even more important, is our ability to append almost any kind of data, because we have geocoded each record.  While personal information remains anonymous to us, we supplement each record with additional data to complete our profiles.  This includes neighborhood level demographics and “exographic” data (i.e., data about the community in which they live).  This includes air quality in the community, data regarding traffic congestion, and nearness to a Wal-Mart or other major chains, for example.

 

In short, we believe there are a multitude of factors that shape consumers’ desires and ability to go green.  And we think the answers can be found by fusing data from various sources to find patterns that are not easy to detect using the data available through the other providers.

 

MG: What types of data categories do you capture? 

 

AH: In addition to the extensive demographics and exographics just mentioned, the survey covers several key modules:

 

Product Category Coverage:  The backbone of Eco-Insights is our product category coverage. For each of more than 70 different categories in our most recent wave, we know how consumers define “green”, what categories they’ve bought recently, their primary reason or motivation for doing so and main deterrent when they do not. 

 

Corporate Ratings:  Another important module is the Earthsense Corporate Ratings.  Between Fall 2007 and Spring 2008, we covered over 700 companies familiar to consumers from many of the largest Fortune 500 companies like Exxon Mobil, HP, and P&G to small but growing companies like Earthbound Farm, Eden Foods, and Stonyfield Farm.  In addition, we include 73 supermarket market chains – nearly every major one in the US – and over 77 restaurants, including 39 Quick Service Restaurants such as Starbucks and Pizza Hut and their competitors.

 

We know which chains people shop in (primary and secondary).  We also know how they perceive these companies including the extent they believe that the company is following sustainable business practices and the impact of the company’s products on the environment. We ask similar questions around their electrical utility.

 

Attitudes & Behaviors:  A third key module covers environmental attitudes and behaviors.  We ask:  ‘Are consumers concerned about the quality of our environment five years from now?’;  ‘Do they believe individuals can make a difference?’; and ‘Do they think “greenwashing” is a problem?’.

 

And for behaviors, in addition to their green purchasing we mentioned earlier, we want to understand how consumers act based on the three R’s [reduce, reduce and recycle].

 

MG: How frequently do you plan to refresh the data?  When is the next survey set for release?

 

With the rapid change in the “green” marketplace, we know that much is changing – and fast.  For that reason, we refresh the data twice a year, collecting 30,000 responses each spring and an additional 30,000 each fall.  Our Spring 2008 data collection ended the first week in June, and we’ll be releasing data to our clients in August. 

 

MG: You’ve indicated that a key concept behind how you designed your Eco-Insights survey is that the results be “actionable.”  What do you have in place to make that happen? 

 

AH: Several things.  As of right now, companies can use our data and services for:

 

Brand / Marketing Strategy.  E.g., Build a deep profile of the eco-friendly/health consumer or understand how consumers define green within specific categories.

 

Product Development.  E.g., Understand attitudes that drive their purchase motivations and barriers by category or identify consumer-based related categories for portfolio expansion of a brand.

 

Category Management / Sales.  E.g., Prioritize retail customers/prospects based on the category opportunity for products, and alignment of product and retailer customers.  Support retail-level sales pitches and category management efforts with consumer-based attitudinal insights [in addition to transactional data].  Utilize data at a store trading area level to maximize ROI for in-store programs, promotion, distribution and merchandising initiatives

 

Marketing.  E.g., Maximize ROI of marketing efforts with clear profiles of how to reach the target consumer.  From online and offline media habit profiles, to scoring a geographical area’s propensity based on desired criteria, the data can assist efforts ranging from media planning to database marketing

 

Consumer Insights. E.g., Allow clients to get more from their consumer insights research budgets as we can use the responses from the Eco-Insights survey as a highly sophisticated screener to re-contact respondents for proprietary custom studies

 

Corporate Social Responsibility. E.g., Rate eco-friendliness of both the company and its products including ‘Likelihood to Recommend’ and ‘Likelihood to Invest’.

 

MG: How can CPGs and retailers use the data to target consumers interested in green products?  How granular can you go?  For example, can you target at the zip code level? How about by product or product category? 

 

At a retail level, these data are extremely actionable.  We capture consumers’ primary and secondary shopping chains which allow us to know what product categories people buy and where they are most likely to shop (and we can do cross-outlet analysis). 

 

We have also asked if they were a customer of other retail chains (e.g., Home Depot, Lowes, Macy’s, Best Buy).  So although we don’t have as specific information for these other outlets we can do, at minimum, analysis by these outlets.  The link between category and outlet profile is very unique and actionable.

 

As for granularity, earthsense has partnered with Pitney Bowes MapInfo to project market potential at very low levels of geography including census block groups, tracts, and trade areas, and yes, ZIP Codes.  Using the PSYTE Segmentation system, retailers can purchase mailing lists based on households living in specific neighborhood types with the highest proclivity to go green.  It’s a soup-to -nuts solution.

 

Earthsense provides category level data, not brand-specific observations.  One of the biggest benefits earthsense subscribers have is the ability to drill down further into the data using our Reconnect Service.  So, say you are a manufacturer of frozen foods.  You can learn quite a lot about consumers who buy this category from our main Eco-Insights survey. 

 

But if you wanted to learn more about the types of frozen foods consumers buy and which brands they favor, you can create a customized survey whose results are appended back to the syndicated survey.  This will give you the freedom to concentrate on just the details you need.

 

MG: Do you have attitudinal and psychographic data that can inform messaging by geography?

 

In addition to partnering with Pitney Bowes MapInfo, we have also formed a relationship with Mediamark Research & Intelligence (MRI).  We’re working this summer to link our databases so that subscribers of both surveys will have unprecedented detail on consumers.  And since MRI is PSYTE-encoded, all of these data are geographically actionable!

 

MG: How do local influencers (exographics) impact attitudes on green?  Do you think these influencers impact attitudes toward green or conversely, attitudes toward exographic considerations?

 

Good question!  There’s a lot of data to sift through and a lot to learn.  While we are not looking for or trying to document causal relationships, we are finding patterns where several factors coexist.  A marketer’s job is to maximize return on investment.  And, we help accomplish that goal by pinpointing those areas where the patterns are the strongest.  

 

Clearly, a person could wish to buy only organic food, ride a bicycle to work, and recycle everything  But, factors such as the proximity to a store or farmer’s market with a good selection, the distance to a workplace, weather conditions and local waste management facilities can prevent or discourage even the most ardent “green” consumer.

 

With an economy that is sputtering, gas prices that are soaring, and issues surrounding safety in our food supply – consumers are weighing multiple factors before they put their put their money down on even the basics.  Earthsense helps manufacturers and marketers by taking a common sense approach to understanding the motivations and barriers that directly affect the purchase of products – particularly those with environmental, health or wellness features.

Eco-labels Impact Consumer Behavior

Eco-labels influence consumer behavior in two ways.  First, they introduce green as a considered attribute at the point of sale.  Second, they enable consumers to comparison shop based on green.  Over the past few years, there have been many new eco-labels launched by governments, manufacturers and retailers.  Many of these labels are listed on Consumer Reports’ Greener Choices site.

Interestingly, the Natural Marketing Institute’s 2007 LOHAS Consumer Trends Database report determined that not all eco-labels have the same impact.  In fact, consumers indicate that they are more likely to make eco-friendly purchase decisions if the eco-labels are also widely recognized and trusted brands in of themselves.  Familiar labels for programs like the EPA’s Energy Star have a more significant influence on consumer behavior than others. 

While such a finding reinforces the value of eco-labels, it does challenge the notion that CPG companies and retailers should necessarily launch proprietary labels to differentiate themselves on green.

Like all brands, eco-labels take significant time and resources to build.  Moreover, given the sensitivities regarding greenwashing, for-profit entities may have to overcome a higher hurdle than government or a non-profit organization given the appearance of conflict if proprietary labels adorn their own products.

 

As such, Marketing Green recommends that product companies and retailers focus on disclosing product information about environmental impact to differentiate themselves in the market rather than trying to define new green labels.  Disclosures provide consumers with information that can inform purchase decisions rather than certify a product’s greenness.  This is what HP has done with its launch of Eco Highlights labels on its products.   

Marketing Green also recommends that retailers simultaneously push for industry-wide labels.  While some retailers may consider proprietary labels as a competitive differentiator, it is likely that broadly recognized labels will accelerate consumer adoption while reduce the cost to support them. 

 

Moreover, retailers should differentiate themselves by sourcing more green products.  Arguably, this is one of Wal-Mart’s strategic priorities today.  Greater variety combined with recognized eco-labels will likely drive more sales as well as consumer loyalty.  In the end, this approach is likely to have more impact for both business and the environment.

Making What’s Inconvenient Matter

An Interview with Matt Williams, EVP/Partner at The Martin Agency and Planning Director for the “We Can Solve It” Campaign

While many consider the release of Al Gore’s An Inconvenient Truth to be a turning point regarding consumer awareness about climate change, consumer surveys indicate that much work is still left to be done.

In fact, six months after the movie’s release, an ACNielsen online consumer survey found that North Americans were the least aware of and concerned about global warming of all respondents from the 46 markets surveyed.

Moreover, North Americans were only half as likely as South Americans (Argentina, Brazil and Chile) – those surveyed that were most aware and concerned – to believe that climate change was “a direct result of human actions”.

This month, however, there is reason to hope. Al Gore’s Alliance for Climate Protection is back with an ambitious 3-year, $300MM campaign to raise awareness of – and to influence behavior regarding – global warming.

Recently, Marketing Green spent some time with Matt Williams, EVP/Partner at The Martin Agency. Today, The Martin Agency serves as the lead agency for the Alliance and is in charge of the campaign’s brand strategy, among other roles.

Willams serves as the Planning Director on this campaign. As such, his role is to uncover insights that will motivate consumer changes in attitudes and behaviors. In many ways this is a daunting challenge for a marketer, given the enormity of the task at hand as well as its importance to the overall effort to solve global warming. Here are his words:

MG: In launching this campaign, what was the Alliance’s primary objective.

MW: The Alliance’s WE campaign is designed to bring public opinion past the tipping point, and compel our elected leaders to take action on climate change. We only have a short window to act, and what we need is a massive, sustained effort to mobilize millions of people – that’s what this effort is all about.

MG: Describe some of challenges that you faced in tackling an issue as daunting as climate change.

MW: Climate change is a huge challenge, and the vast majority of people realize the urgency and enormity of the threat. But, human nature being what it is, a challenge this large can be almost paralyzing.

We had to break through the assumption that the climate crisis is too big for a regular person to tackle. We had to tell people that, yes, this is an urgent challenge, but like other massive challenges, if we put our differences aside and band together to solve it, we can do it. Adding elements of optimism and solvability to the urgency of solving the climate crisis was the key challenge of the campaign.

MG: Is it realistic to expect a marketing campaign to have a significant impact on attitudes and behaviors regarding climate change?

 

MW: The advertising is just one piece of the Alliance’s 3-year effort – and it’s a multimillion dollar, national ad campaign, stretching from coast to coast in every type of media.

 

The Alliance has also launched a program of online engagement and activation, providing opportunities for citizens get and stay involved; and is partnering with organizations that will work across the political spectrum to reach people in their day-to-day lives.

As these efforts work together and build momentum over the life of the campaign, we expect to mobilize millions of people for solutions to climate change.

MG: What is your campaign idea? What were some of the consumer insights from which it was derived?

 

MW: We know consumers are frustrated with partisan bickering. We know the vast majority of Americans accept the reality of the climate crisis and want to engage in solving it, but they don’t know how to get involved.

And we know that consumers view the climate crisis as too large and urgent a challenge to be held hostage by political gridlock. The campaign idea is that we have to set aside our differences and come together to solve the climate crisis. If we don’t come together, the problem won’t be solved—it’s too big.

But if we come together, we can speak with a unified voice to demand solutions. The campaign and the WE idea are designed to create a motivating sense of energy and optimism and to invite everyone to participate in solving climate change.

MG: What are the key elements of the campaign? Overall, how are inpidual tactics integrated across channels? Conversely, inpidually, how were each tactic tailored for each channel?

MW: In terms of the ads themselves, we’re combining television – because of its reach to the broad audience we’re trying to speak to – with print, in issue-specific publications aimed at key groups, and online ads that can be carefully targeted as well.

Every ad, in mass media or online, drives traffic to http://www.wecansolveit.org, the Alliance website. At the site, consumers can find a wide variety of information about the climate crisis and ways to get involved—from petitions to government leaders to local events. They’ll also have the chance to join the Alliance by giving us their e-mail address. So this is more than ad campaign—it’s an integrated effort to engage consumers, and turn that engagement into real action.

MG: How will you drive viral marketing? What is the role for social media? How do you build grassroots support for action?

MW: The online and grassroots components of the campaign will provide opportunities for inpiduals to get and stay involved in ways that make sense for them. Our cutting-edge online organizing and activation, built around the website, will give people a spectrum of activities to keep them engaged on the issue, from taking action in their personal lives to working in their schools and communities to joining calls for government action on all levels.

 

We’re also using the “network effect” – getting the word out through ready-to-use content (like embeddable videos) and social media that enable communities and inpiduals to engage on the issue, spread the word and become local champions.

 

The Alliance has created partnerships with local and national groups to get the word out on the grassroots level, so consumers not only see the WE brand in media outlets and online, they feel it through other groups and activities that are important in their lives.

 

We’re also looking at ways for consumers to use elements of our campaign to create their own WE content, to help build viral momentum and actively involve consumers in creating the WE brand with us.

MG: How involved has Al Gore been in the planning of this campaign?

 

MW: Vice President Gore has been an integral part of the WE Campaign’s development from start to finish. The Alliance and the We campaign are built on the idea that the climate crisis is urgent and solvable, and VP Gore’s goal is to ensure that we get the word out as effectively as possible.

MG: How did you incorporate innovative approaches in this campaign? What are they and how did they impact the consumer experience in a novel way?

 

MW: The entire campaign is rooted in a brand idea that will unify every effort, in mass media, online and grassroots. The idea of bringing Unlikely Alliances like Newt Gingrich/Nancy Pelosi and Pat Robertson/Al Sharpton together is an attention-getting way to make our point about coming together to solve the crisis.

That theme will continue in the future and in other parts of the campaign, and has great potential for interesting and involving messages in every medium.

We’ll also use the couch from the TV, print and online ads as an icon for coming together.

The creation of the WE mark gives us a symbol that people everywhere can use to display their commitment to solutions. WE can become part of people’s lives beyond the campaign.

Also, our focus on Influencers as a media target is designed to communicate our message to people who start conversations. When millions of Influencers engage their network members and policymakers in a discussion about solutions to the climate crisis, the conversation will take on even greater momentum.

It’s an amazing privilege for us to be involved with the Alliance in helping address this incredibly important challenge.

Action by Governors Highlights Shifting Sentiment on Green

Last week, I had the opportunity to witness a milestone being reached in the effort to fight global warming:  officials from 18 states – representing a majority of the US population – signed an agreement at Yale University that committed their states to action on global warming. 

While some states like California and New Jersey have already put formal carbon reduction targets into place, this agreement clearly reflects growing national support for action.

 

Governor Jon Corzine of New Jersey Signing the Governor’s Declaration

               

Governor Kathleen Sebelius of Kansas Addressing the Conference

Marketers should take careful note.  Shifting political winds are more than a sign that legislation is on the horizon; they also may reflect a change in consumer sentiment that is fueling them. 

 

For marketers, three themes emerged that they should consider:

 

The time is running short for companies to be first movers on green.  Conference participants expressed their belief that action on global warming was all but inevitable with a new administration – regardless of party affiliation.   As such, the window of opportunity is closing for brands to be an early mover on green.  Once Congress mandates change, it will take more effort for a company to convince consumers of their green authenticity than if they did so now on their own volition.  (See also Marketing Green’s “Waning Opportunity to be Early Mover on Green”).

 

Consumer perceptions of green are evolving.  The image of environmentalists as tree huggers is fading.  In fact, Governor Schwarzenegger claimed that being an environmentalist today is “hip, cutting edge, self-confident, sexy”.  What more could companies want when it comes marketing green?

 

Governor Schwarzenegger at the Conference

               

Brands must adapt to changing consumer sentiment on green.  As consumer attitudes on green evolve, companies must also reposition their brands to maintain relevance with consumers.  Marketers should note that at least two factors will help accelerate this shift in consumer sentiment.

First, Al Gore’s Alliance for Climate Protection is launching a 3-year, $300MM campaign to propel consumers to take action on climate change. 

Second, consumers may use their purchasing power to influence corporate behavior on green.  While Americans are voracious consumers, they do not like to do so at the expense of others.   For example, the vast majority of Americans are firm believers in child labor and worker safety laws.  

Today, headlines focus on food shortages and the civil unrest that it has caused in many poor nations.  Corporations that are perceived to be perpetuating food shortages through their activities (eg, competing with local farmers for water rights, promoting the use of biofuels that divert cropland away from food production) may feel the wrath of consumers that use their purchases to express their opinions. (See also Marketing Green’s “Green May Be Ho Hum for the Holidays But It’s Here to Stay”).

 

For marketers, such undercurrents are important to monitor closely.  Consumer sentiment is shifting and will inevitably reach a tipping point.  Smart companies will take action ahead of time to avoid ending up on the wrong side of the line.

 

Shifting from Product Placement to Engagement in Green

For decades, marketers have leveraged product placement to influence consumers.  The idea is quite simple: leverage media to showcase a product or service being used as part of everyday life in order to shape consumer brand perception and impact purchase behavior.  Put a product in the hands of a celebrity and consumers will interpret this as a de facto endorsement.  Such placements have been embedded across all types of media including television, film, video games, books and music videos.

 

The digital channel has upended this traditional approach by enabling marketers to go well beyond simple product placements to create meaningful experiences for engagement.  Not only does such an approach promise to yield greater brand impact, but it may also drive significant sales as well.  Here are a few examples:

 

Digital Video Recorders (DVRs): Early last year, GE launched its latest ecomagination campaign.  To counter growing consumer use of DVRs to bypass commercials, GE provided an added incentive for consumers to watch: embedded content in the commercial itself that required a DVR to access it. 

 

Called One Second Theater, this “commercial within a commercial” provided a duel advantage for an advertiser: not only did consumers view commercials that they would have otherwise skipped, but they also engaged with added brand content as well.  Moreover, as one of the first to use this tactic, GE benefited from the novelty factor as for many consumers this was likely their first experience with embedded content in a TV commercial.

 

Screenshot from GE’s One Second Theater

Mobile Phones:  Mobile applications are emerging to enable consumers to access web content via their phones through scannable bar codes associated with hyperlinks to the web.

 

Scannable 2D Bar Code with Hyperlink to Website

Source: thinkmobi

Semapedia 2D Bar Code Hyperlink to Green Maps, an Open Source Location-based Search Engine

 

Such applications enable consumers to use their mobile phones to access content on-demand from anywhere a bar code is posted.  This capability is just emerging in the US; it is likely to take another year or so until all mobile phones are enabled to scan and interpret these bar codes.  Nonetheless, there are many applications emerging for green marketers using 2D bar code technology:

 

For example, tags can be embedded at the point of sale to provide links to additional product information including its environmental footprint.  Moreover, they could also be embedded directly on products.  With such bar codes, friends that ask “where did you get that?” can easily link to a site to make a purchase or locate the nearest retailer to do so.  Alternatively, such tags can provide additional information specific to a location. 

 

Video: Video applications are emerging that enable embedded objects clickable and associated with added content or a call to action. 

 

Screenshots from Videos Posted on VideoClix

Such product-linking, or plinking, provide significant opportunities for both advertisers and consumers:  not only does it provide a more compelling content experience, but it also provides a more relevant experience as the embedded advertisements directly relate to the video content itself.  Moreover, it eliminates the need for consumers to view pre-roll commercials, a barrier for many users to watch the video in the first place. 

 

 

Open Skies Agreement Provides a Glimpse of What’s to Come in a Carbon-Regulated Environment

Today, many executives, and especially those working in carbon-intensive industries, are grappling with how future carbon regulation may impact their businesses and industries.   

To deal with uncertainty regarding such strategic issues, many corporate executives turn to scenario planning or even game theory to think about how the future competitive environment may unfold and how it may impact their companies.  By doing so, corporate executives are, in effect, peering into the future to get a glimpse of what may come. 

Given its contribution to climate change, expected growth rate and evolving regulatory environment, the commercial airline industry presents an interesting case study to learn how competitive dynamics may change in a carbon-regulated environment. 

Today, airlines are responsible for emitting 2-4% of greenhouse gases from manmade sources.  Significant gains in fuel economy have been made with each generation of aircraft; the new Boeing 787, for example, promises a 20% increase in fuel efficiency.  Yet, total emissions continue to rise as industry growth (4.4%) has outpaced fuel economy (1.3%) by more than 3:1. 

There have been attempts made to regulate carbon emitted from commercial aviation.  The Kyoto Protocol, for example, counts emissions from domestic airline sources in its targets.  Emissions from international travel are omitted, however.  

While there is growing support to include international aviation under any successor treaty to Kyoto, it is far from certain that this will happen.  As such, the EU has taken unilateral action by imposing higher landing fees based on a plane’s greenhouse gas emissions (pending parliamentary approval).  This arrangement would include not only internal EU flights (by 2011) but, very importantly, international flights that take off or land from the EU (by 2012).   

By doing so, the EU is flexing its muscle, establishing its authority to regulate carbon emissions for companies that operate, but are not based, within the EU.  While similar to how more terrestrial multi-national corporations operate today, this is groundbreaking in the airline industry: historically the industry was regulated through bilateral negotiations or the UN’s International Civil Aviation Organization.  In effect, the EU is simultaneously balancing growth objectives in aviation with its efforts to mitigate environmental impact.   

The Open Skies agreement between the US and the EU is a great example of this.  Tomorrow, Phase I of this agreement goes into effect.  Its primary impact will be to provide open access for airlines to fly between the US and the EU.   

Not surprisingly, this agreement has caused a heated debate.  While the EU expects an increase of up to 26 million additional leisure travelers over the next five years (representing a 14% increase in passengers), there are many that cry foul and accuse the EU of undermining its own efforts to reduce global warming.  In fact, adding the new passengers may increase global emissions by the airline industry up to 0.7%.      

But, that is not all.  Changes in emissions do not include additional business travelers or air freight.  Moreover, this number represents the net increase in air travelers only; it does not include those who may substitute international travel for their current domestic travel due to price declines.  A shift to longer-haul flights to the EU has the potential to increase air travel distance. As a result, global emissions from the airline industry may increase by 2.8% more, for a total of 3.5% rather than 0.7%.  Off a global base of 2.3 billion air travelers, this is a significant increase in carbon emissions from a single bilateral trade agreement.

To balance growth with the environment, the EU will require airlines to participate in an emission trading system that will provide the incentive for airlines to both reduce overall emissions and offset the rest.  While implementation will be gradual, the result will be to create a dynamic case study by which we can discern how the competitive environment will be transformed as carbon regulations take hold.  Here is how the scenario may unfold: 

Governments may wield new influence to demand higher standards.  In the aftermath of the Kyoto negotiations, there is a belief that substantive progress on climate change will be held back by a few, albeit influential, nations.  While this is possible, there is another scenario that is more likely given the interdependence of the global economy: higher standards will be achieved by using economic leverage to achieve them. 

The Open Skies agreement is a classic example of this.  The US wants more access to European markets for US carriers while the EU has clearly tied this access to increased regulation on carriers. 

Indeed, the rhetoric has been intense.  Jacques Barrot, the EU’s transport commissioner, has made it clear that the EU was prepared to “[reduce] the number of flights or [suspend] certain rights” if EU emission regulation were not honored.  Not surprisingly, the Bush administration has vowed to fight the unilateral imposition of emissions caps by the EU.   

Such opposing views reflect public opinion: while 40% of Britons support an increase in airline fares to reduce global warming, only 20% of Americans say they do.  Nonetheless, there is a growing consensus that the US will acquiesce under a new presidency. 

Public sentiment may accelerate action before regulation takes effect.  JPMorgan predicts that required carbon offsets under the Open Skies agreement will not significantly increase prices until 2015 or beyond: 87% of the necessary permits will be distributed for free to incumbent airlines, reducing pass through costs to consumers.  Instead of an estimated €20 surcharge, international passengers may pay an additional €4 per roundtrip in the foreseeable future (though rising substantially after 2020). 

Nonetheless, public sentiment will not likely stand still – especially in light of the 3-year, $300 million campaign that Al Gore’s Alliance for Climate Protection is expected to launch next month to raise awareness and change people’s minds regarding the environment.  As JPMorgan points out, it is likely that “carriers that present themselves as unconcerned about environmental degradation or deny the airline industry’s responsibility to address the problem could find themselves targets of activist campaigns, with negative implications for both public image and revenue.”   

As such, Marketing Green recommends that airlines stay ahead of public sentiment, regardless of the status of environmental regulation.  This can be done by publicly recognizing the challenge and by taking action steps to reduce its environmental impact directly from air travel or ancillary services such as travel to and from the airport. 

This is all the more important for carriers flying on international routes.  The Open Skies agreement, for example, will likely increase competition between airlines as more airlines establish direct routes between US and EU destinations.  US airlines must be sensitive to European concerns about the environment, for example, if they are to win a share of the market. 

Even in a carbon regulated market, green remains a differentiator.  By imposing carbon emission fees, the EU is effectively setting a minimum standard for an airline to be green.  In effect, the imposition of regulation resets the competitive environment by clearly defining what it means to be green and insulating companies from further criticism if they meet the standards set by government.   

While this is generally true, companies should recognize that even with standards in place, green will remain a powerful market driver.   

For example, airlines will still be vulnerable to activists who call them out for not being consistently green across their operations.  While regulation offsets the impact of aviation fuel, it does not necessarily apply to corporate operations, the ground crews servicing the plane, or even the manufacturing of the plane itself, for example.   

Moreover, customer needs are evolving and airlines need to adjust their offering to align with them.  For example, KPMG UK currently offers its 11,000 employees additional Membership Rewards points on their American Express cards if they take a mode of transportation that has less impact on the environment (trains versus planes).  They are also promoting greater use of teleconferencing which reduces travel time and environmental impact altogether. 

Airlines are starting to respond.  For example, on trans-Atlantic flights to Paris, Continental Airlines offers connecting rail service to Lyon.  Moreover, Silverjet, a new player in the premium category, was the first to become carbon neutral, embedding carbon offsets in its ticket purchase price.  

Marketers should carefully watch how the Open Skies agreement unfolds with time.  The agreement provides a window into how governments may negotiate carbon emission reductions in the future, as well as how marketers could respond to changing consumer sentiment and needs in a carbon-regulated environment. 

Investing in Green Innovation

As companies plan their green investment strategies for 2008 and beyond, they should take into account that caps on carbon emissions are all but inevitable in the future.  In fact, it is highly likely that caps will be in place in the US within the next few years.  The 187 nations that attended the UN climate conference last month in Bali (including the US) agreed to negotiate a successor agreement to Kyoto by the end of 2009.  Perhaps more importantly, Congress already has several climate bills under consideration.

How aggressive will carbon reduction targets be?  A recent Human Development Report by the United Nations Development Programme concluded that developed nations needed to reduce carbon emissions by greater than 80% from 1990 levels by mid-century in order to advert the worst impact of climate change.  Under any implementation scenario, carbon caps will likely be imposed over many years, if not decades, providing a window of opportunity for companies to adapt to and compete in this new world order.

In many ways, the imposition of carbon caps will reset the current competitive landscape.  Those businesses able or willing to adapt more quickly to this changing landscape will likely secure a competitive advantage by differentiating their brand or products, or by improving their cost basis. 

Despite the arguments for moving quickly, many companies will likely delay investment in green as long as they can, and do so for seemingly good reasons.  First, exact targets are uncertain.  Second, the timeline for implementation may take years, if not decades. 

Finally, the misuse of financial practices may preclude smart green investment.  A recent Harvard Business Review article, Christensen et. al., suggests that there are three ways that incorrect financial practices suppress investment in innovation.  Marketing Green believes that as green investments are largely investments in innovation, it is very likely that the misapplication of financial practices that impede innovation may also hinder prudent investments in green.  (Clayton Christensen, Stephen Kaufman and Willy Shih, “Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things”, Leadership & Strategy for the Twenty-First Century, Harvard Business Review, January 2008).  Here is how:

Cash flow modeling: Companies often do not fairly compare the projected discounted cash flow from a new investment with that generated from current operations because they assume that current cash flow will remain constant in perpetuity. 

In fact, as Christensen et. al., explain, this may not be the case: in the absence of continuous “innovation investment”, the more likely outcome is a “decline in performance” in existing operations.  Without this downward adjustment, however, financial analysis creates a “systematic bias” against innovation in new products or processes – green or otherwise.  

Asset lifetime: Financial managers may mistakenly assume that that an asset’s usable lifetime should be based simply by its depreciation period, rather than its “competitive lifetime”.  Said differently, even though the continued use of an existing asset generates a more attractive return in the near-term (typically because capital equipment costs are already sunk and therefore not included in the calculation) than an investment in a new asset, it may not be the best decision for a company if it wants to maintain its competitiveness (and cash flow) longer-term. 

A famous example cited by Christensen et. al., is the case of Nucor and US Steel.  Nucor invested in new minimills that yielded a low average cost of production. Instead of following suit, US Steel stuck with its existing mills because the marginal cost of producing incremental steel was lower than investing in minimills (because it was simply putting excess capacity to use) and therefore more financially attractive in the short term.  

In this case, US Steel relied on marginal cost analysis to inform near-term production decisions that was insufficient for making longer term investment decisions.  As Christensen et. al., point out, “When creating new capabilities is the issue, the relevent marginal costs is actually the full cost of creating the new.”  As a result, US Steel’s average production cost remained much higher than Nucor’s and Nucor was able to out compete US Steel longer term.  

Applied to the green space, many companies may decide to defer investment in greener technologies given the upfront capital requirement to do so.  This decision may extend the life of less efficient technologies, manufacturing processes or products in the market.  Yet, it may prove disadvantageous longer term as other competitors or new entrants make more aggressive investments that generate a more sustainable competitive advantage when carbon caps become more restrictive longer term. 

Quarterly earnings: Companies that focus on quarterly earnings may systematically under invest in innovation as they are not rewarded by the market for doing so.  Given that the time horizon for green may take years to pay off, green initiatives may likely be underfunded relative to initiatives that are able to contribute sooner to earnings. 

Marketers need to think strategically about their investment in green.  Caps on carbon emissions will reset the competitive playing field, though they may be imposed gradually over years, if not decades.  Early movers  may enjoy a competitive advantage in the market based on their brand, products or cost position.   

There is a good chance companies will underinvest in green due to regulatory uncertainty and the misuse of financial practices that may favor investments that yield near-term benefits at the expense of long term competitiveness.  

Marketers must understand and compensate for bias that leads to underinvestment in green.  Formulate a strategic vision for green, properly balance the risks and rewards and invest for the long haul.  Your shareholders will thank you.

Green Brand Disconnect

This week’s cover story in BusinessWeek featured the experience of Auden Schendler, corporate director of environmental affairs at the Aspen Skiing Company (ASC), as he tried to convince his senior management that going green was worth the investment (“Little Green Lies,” October 29, 2007).

 

            

From an outsider’s perspective, one might think that ASC would be highly receptive to eco-friendly investment opportunities, as the company has incorporated green as a core brand pillar and a central theme in its marketing communications.  Yet, as Schendler points out, things are not always at they appear; apparently, ASC is not as green as its brand might suggest.

In one example, Schendler points out that in the past, senior management has resisted even modest investments in proven technologies – such as compact florescent light bulbs (CFLs) in hotel rooms – that yield measurable cost savings and a positive ROI.  The rationale: CFLs are not aligned with the brand experience ASC wants for its customers.  As one hotel manager said, “Fluorescent light would suggest a waiting-room ambience, jeopardizing the establishment’s five-star rating.” 

Such a world view, however, does not seem to acknowledge evolving social norms and consumer expectations regarding green.   According to a recent JD Powers Hotel Guest Satisfaction Survey, 75% of hotel guests are willing to participate in environmental programs.  In the luxury hotel category, an even higher percentage of guests are willing to participate: 87% of Baby Boomers, 95% of Gen Xers and 79% Gen Yers.  Based on this consumer data it seems that ASC may be underestimating their guests’ interest in and expectations for green as part of their hotel experience. 

As such, it seems that ASC’s decision not to invest in CFLs may be at odds with current consumer sentiment.  In fact, CFLs have already gone mainstream.  Today, many luxury hotels already use CFLs for lighting.  Their light quality has improved tremendously.  And, retailers are selling them aggressively, despite the fact that incandescent light bulbs are more profitable for them.  In fact, Wal-Mart has sold over 100MM of these bulbs this year alone.  

Moreover, not investing in CFLs seems contrary to ASC’s own brand positioning and communications in the market.  In fact, just weeks before the BusinessWeek article ran, ASC launched a new advertising campaign that, according to the Salt Lake Tribune, used “high-profile skiers and snowboarders to tout the resort operator’s environmental record and urging others to take action, too.”   This campaign is supported by a lightly branded microsite called Save Snow which educates visitors about what ASC is doing and what others can do to reduce climate impact.   

Ironically, the campaign also includes plans to send 40,000 CFLs to its customers.   

 

So, marketers should take note.  Consumers are increasingly willing to participate in environmental programs at hotels, and especially at luxury ones.  

Hotels should not be afraid to invest in green initaitives including CFLs.  Not only can such programs provide attractive ROIs, but, for companies such as ASC, they can ensure that the consumer experience aligns with their brand positioning in the market.  For ASC, the decision not to purchase CFLs is, at best, inconsistent with its brand.  At worst, the company risks that its marketing efforts are perceived as green washing.

Drought Can Spark a National Dialogue on Climate Change – Part II

“You can’t call it a drought anymore, because [the US Southwest is] going over to a drier climate.  No one says the Sahara is in a drought.”   — Richard Seager, Scientist, Columbia University’s Lamont Doherty Earth Observatory as quoted in “The Future is Drying Up”, New York Times Magazine, October 21, 2007 

As first published in its July 14, 2007 posting, Marketing Green believes that persistent drought in the US can be an effective catalyst that sparks a broader, national dialogue on climate change.  With drought conditions worsening in areas of the US, the time is now for such a conversation. 

Drought can be a catalyst for a broader dialogue for many reasons. First, drought will directly impact the human condition, causing inconvenience and suffering.  Second, drought will likely cause economic hardship by limiting growth, reducing output, and significantly increasing costs (eg, building infrastructure to move water long distances or desalinate water).  Finally, droughts force political leaders to make unpopular trade-offs that require voter sacrifice. 

Indeed, as tomorrow’s New York Times Magazine reports, drought conditions are worsening in the historically dry Southwest while expected population growth will put more demands on limited resources in the years to come.  Shortages are on the horizon across the region, but are especially apparent in cities like Las Vegas which is dependent on water from Lake Mead, the largest man-made reservoir in the US, that is currently at less than half of its capacity.   Moreover, continued shortages will likely pit one entity against another in price wars and legal battles as individuals, businesses and governments compete for scarcer resources. 

Drought conditions in the typically temperate US Southeast may demonstrate a more alarming trend because they are so unexpected.  With scorching heat this past summer and a hurricane season that failed to materialize, the city of Atlanta confronts the drier winter season with record low water levels in its reservoirs.   Most experts agree, it is the driest period every recorded in the Southeast; few signs are on the horizon that suggest the situation is likely to improve any time soon. 

Interestingly, extreme drought in the Southeast is fueling water disputes between regional states over scheduled water releases from Lake Lanier, the primary water source for three million Georgian residents, that are mandated by the Endangered Species Act and enforced by the US Army Corps of Engineers. 

Currently, as Georgia enters what is typically its driest month, Lake Lanier holds a mere 81 days of stored water left.  Georgians have responded by imposing severe restrictions on water use, but unbridled growth over the past decade and limited water use planning up until now have put a strain on existing resources.   

But, it is the actions by the Georgia legislature that, perhaps, are generating the most controversy.  Pending legislation would temporarily wave compliance with the federal Endangered Species Act and allow Georgia (via the Corps) to suspend water releases from the Lanier that currently protect endangered mussels and sturgeon downstream.  So far, the Corps refuses to budge which means that a legal showdown is likely ahead. 

The state of Florida has leveled a complaint already, asking Georgia to release more, not less, water to protect Floridian biodiversity.  Moreover, Gov. Bob Riley of Alabama has asked the Corps to release additional water from other Georgian water sources in order to alleviate shortages in that state.    

It is likely that cross-border disputes will only intensify if sufficient rains do not come soon.  In fact, facing severe water shortages, Atlanta may soon become the first metropolitan region to reduce water available for commercial and industrial activities, a threat to the local economy.   These threats will only be compounded if reservoirs do not refill before next summer when water use is traditionally the highest.  

As water become more scarce and entities compete for dwindling resources, marketers have an opening to leverage drought a conversation starter for a national dialogue on climate change.  In many ways, expanding drought conditions will force the conversation as we will have to deal with consequences of a drier climate whether we are prepared to do so or not.  

Because the populous in the US is geographically dispersed, however, marketers risk that such discussions will be isolated to those regions most affected.  As such, it is an imperative for marketers to broaden the discussion regarding worsening drought conditions and their causes to create a truly national debate.