Corporate Social Profitability?

Posted By Milos Sugovic

When Yoplait donates on behalf of consumers to the Susan G. Komen Breast Cancer Foundation in exchange for pink lids, does the philanthropic giving translate into profit? That depends on the effectiveness of its public relations initiative.

Corporate social responsibility (CSR) is one of the fastest growing facets of marketing, but the debate regarding the profitability-CSR spending tradeoff, let alone the role of PR, continues to rage. Only half of surveyed executives plan to invest more in corporate social responsibility programs, and the half that don't are probably the same leaders who see an inverse tradeoff as illustrated by the graph:

Inverse Relationship (A)

Conventional wisdom suggests that an increase in CSR spending increases costs of production and puts pressure on markup, thus reducing profitability and competitiveness.

Positive Relationship (B)

An increase in CSR spending creates economic, regulatory, ethical and philanthropic externalities which not only act as publicity multipliers, but also capture consumers' willingness to pay a premium for ethically made goods, thus generating additional revenue in the long-run.

But many executives fail to realize that there are variables that may increase a company's chances of following the graph's B curve. One is the company's commitment to communities, employees, environment, charity, and/or product quality. The second is the effectiveness of its accompanying PR initiative.

The world's top brands are committing to CSR as they face challenges from tougher customers. Indeed, a survey conducted by IBM found that CEOs plan a 25 percent increase in spending over the three-year horizon to satisfy consumers concerned about social issues.

Smaller companies aren't far behind, as many are jumping on the bandwagon with modified forms of CSR. In fact, research suggests that small and large firms are equally motivated to participate in CSR, suggesting a U-shaped relationship between firm size and CSR involvement.

But before any business dives into CSR, it needs to gauge the market dynamics and determine CSR potential. The bottom graph takes the positive relationship (B) in the top graph and breaks it down to show how companies may experience differentiated returns from a CSR program:

Diminishing Marginal Returns (B')

As CSR spending increases, the additional profit decreases due to crowding out, particularly for clients with limited capacity and low know-how PR firms.

Increasing Marginal Returns (B")

This is the desired outcome. There's positive feedback and potential for capacity expansion on both the client and PR front as CSR spending exhibits positive returns. In other words, as the CSR initiative grows, the more it will generate customers and profits, which can be re-funneled back into CSR.

What determines the returns on CSR spending is the quality of the PR initiative. To ride the positive feedback waves, PR firms must do their homework and navigate the highest ROI areas. Otherwise, it's just a pricy game of trial and error.

Comments

[MattP]

I had to dig up this article: http://online.wsj.com/article/SB121018735490274425.html

The bottom line: Consumers do place a higher value on goods and services produced in socially responsible ways, i.e. they’ll pay more. However, companies don’t have to go whole hog into CSR to reap the benefits. If a company makes even a small effort toward CSR, consumers will reward it as much as a company that spends much more money doing it.