Doing good for the world - using pricing to promote sustainability goals

The Global Climate Crisis and Recent Initiatives

Over the past three years, the world has seen significant advancements in net-zero goals and climate initiatives.

Some key highlights include:

Policy: Global Commitments: The number of countries, regions, companies, and more who have committed to net-zero emissions by mid-century or earlier has significantly increased in recent years. For instance, the Glasgow Climate Pact at the UN Climate Change Conference in 2021 saw more countries committing to such goals.

Product Adoption: Electric Vehicles (EVs): The increased adoption of electric vehicles has been driven by improvements in technology, government incentives, and commitments from automakers who are working to gradually phase out internal combustion engine vehicles. In fact, this is a particularly good example of where pricing specifically has been used to shape perception, willingness to pay, and market expansion.

Product Innovation: Renewable Energy: Solar and wind power has become more cost-competitive, allowing for greater deployment of such renewable energy sources. Moreover, these cost declines have created opportunities for a broader range of pricing and for new entrants in the market.

Capital: Green Finance: More investment has flowed into sustainable projects and businesses, including green bonds, sustainable investment funds, and other financial mechanisms.

Market: Corporate Action: Many companies have set ambitious emissions reduction targets, often aligning with the goals of the Paris Agreement. This includes not only reducing emissions from their operations but also from their supply chains.
Technological Innovation: There have been significant advancements in technologies that can help reduce emissions, such as carbon capture and storage, sustainable agriculture practices, and energy-efficient building materials. So, this is another aspect that impacts cost and subsequent pricing options while changing the paradigm for sustainability. Significant examples include reusable consumer products, milk alternatives, meat alternatives, etc.

While the world has made progress towards sustainability goals, there is still a long way to go. For example, the United Nations set 17 Sustainable Development Goals (SDGs) in 2015 to be achieved by 2030. But, progress has been overall quite uneven across different goals and regions. For instance, goals in areas such as poverty reduction, access to education, and access to clean water are on track but with some countries making more progress than others. Meanwhile, goals related to climate change and sustainable consumption and production have slowed and stagnated with little progress. And, there has even been some regression with regards to access to healthcare and hunger, especially for areas affected by conflict and economic downturns. In fact, the COVID-19 pandemic has really negatively affected the progress of many of these goals, causing setbacks and unforeseen challenges. And, while the use of renewable energy sources has increased over recent years, global temperatures continue to rise, leading to more frequent and severe weather events.

It is clear that more concerted and accelerated efforts are needed to fully achieve the goals set and make a real difference.

The Challenges of Climate Tech Companies

Climate tech plays an important role in driving innovation and adoption impacting sustainability efforts. In spite of the advances and efforts made in the past few years towards net-zero goals and proactively enforcing climate initiatives, climate tech companies today continue to face many unique challenges to building, scaling and sustaining their ventures. These include:

Long Development Cycles: Developing useful climate technologies in particular often requires significant research and development, as well as testing and validation. This can result in long development cycles and high upfront costs, which can be challenging for startups and smaller companies.
Regulatory Uncertainty: Climate technologies are often subject to evolving regulations and policies related to climate change. Though many jurisdictions have introduced and/or strengthened environmental regulations, these changes have led to a lot of uncertainty about future regulations, thereby making it difficult for companies to plan investments and scale their operations accordingly.
Access to Capital: Securing financing can be challenging for climate tech companies, particularly at the early stages of development. Investors may perceive climate technologies as risky or may be hesitant to invest in unfamiliar technologies. Furthermore, some climate tech companies are not as commercially-minded or prepared, so access to capital can be even more difficult as it requires finding investors that have sustainability as part of their thesis and/or are willing to wait for longer times, messaging the commercial outcomes to the sustainability impact, and more.
Scaling Challenges: Scaling up production of climate technologies can be challenging due to factors such as supply chain constraints, limited manufacturing capacity, and the need for specialized skills and knowledge. Climate tech companies in particular will have specific standards for approving a supplier, experience costs for certain materials, and run into other complex technological issues that lack easy solutions.
Market Adoption: Convincing consumers, companies, and even governments to consider climate tech solutions can be difficult as they may entail changes in behavior or significant upfront costs that they do not want to take on.

Of course, many climate tech companies and their customers frequently face the challenge of the “green premium”, which refers to the additional costs that consumers may have to pay for goods and services produced in an environmentally friendly way compared to traditional alternatives. This premium is typically associated with products that use sustainable materials, have lower emissions during production, or are designed to be more energy-efficient. For instance, one relevant example of the “green premium” is the higher upfront cost of eco-friendly detergent, such as Seventh Generation or Ecover, as opposed to the mainstream brands like Tide. And, so, this premium can range from a few cents to several dollars per unit depending on the specific product and retailer. For example, Tide’s unscented liquid laundry detergent is a few dollars cheaper than Seventh Generation’s or Ecover’s equivalent products, so there is a clear cost difference between the different brands.

However, even beyond the “green premium”, climate tech companies are facing the unique challenge of technological complexity and integration more and more.

Because climate change is such a multifaceted problem, it requires solutions spanning various sectors and technologies. So, climate tech companies often need to work on developing technologies that not only reduce greenhouse gas emissions but also integrate with existing infrastructure and systems.

Furthermore, this challenge is compounded by the need for interoperability and scalability, as these technologies have to work together seamlessly and be scalable to have a meaningful impact on reducing emissions. So, this not only requires technical expertise but also seamless collaboration with other stakeholders, including governments, businesses, and research institutions.

Moreover, other challenges emerge related to data availability and quality. Developing effective climate solutions requires access to accurate and comprehensive data on emissions, energy usage, and other relevant factors. However, such data is not always readily available, and ensuring its quality and reliability can be a significant challenge.

The Role that Pricing Can Play

Despite the many challenges that climate tech companies currently face, they can utilize pricing to move customers and advance many of their critical environmental ambitions.

Create commercial viability and opportunity

Pricing can help not only make climate tech companies more impactful but also help them formulate commercially viable solutions. As a result, pricing can help them sustain themselves as cash flow businesses, bootstrap or attract investment opportunities. For instance, pricing based on value delivered to customers can help climate tech companies capture a larger share of that value. And, highlighting the environmental and social benefits of their solutions specifically can justify their higher prices and create a loyal customer base willing to pay a premium.

Change the game climate tech plays

Climate tech companies can use pricing strategies to move from traditional cost-based pricing games to more creative value or choose strategic games to create real asymmetry and differentiation in their offers and models. For example, companies can create bundles of products or services that cater to specific customer needs to create differentiation and value. A climate tech company could offer a complete energy management solution that includes energy monitoring, efficiency upgrades, and renewable energy installation, providing customers with a comprehensive solution.

For example, Schneider Electric offers a digital platform called the EcoStruxure Platform, which provides a suite of tools for energy management such as monitoring, control, and optimization of energy use across multiple buildings, data centers, and industrial facilities. This is an example of bundling products and services together to create value for customers and attract those who are looking for comprehensive solutions. And, in fact, companies can even collaborate with other climate tech companies in the ecosystem to create value-added services or integrated solutions that can create differentiation and provide customers with a more compelling offering.

Schneider Electric also uses segmented pricing strategies to target different customer segments by offering differing pricing for residential, commercial, and industrial consumers based on their specific needs. Meanwhile, Opower (now part of Oracle) utilizes a pricing strategy that allows it to scale its business effectively by charging utilities based on the number of customers or households served. And, Nest uses a premium pricing strategy, positioning its products as high-quality, innovative solutions for smart homes. In spite of these higher prices, Nest has been successful due to the value and convenience its products offer to consumers. All of these examples show the diverse ways climate tech companies have utilized pricing in unique ways in order to stand out and succeed.

Redefine the value of sustainability

Climate tech companies can even use pricing to help redefine the public perception of environmentally conscious businesses among consumers. By pricing for educational institutions, they can even provide educational resources and tools to help consumers understand the environmental benefits of choosing their business and encourage more sustainable purchasing behavior. For example, Tesla offers educational institutions discounted pricing for their Powerwall energy storage systems and solar panels, not only providing them with renewable energy solutions but also an educational opportunity.

Additionally, climate tech companies can position their products or services as premium offerings, emphasizing the superior quality, durability, and environmental benefits compared to conventional alternatives. This can help shift perceptions of environmentally conscious businesses as offering only basic or inferior products. Finally, being transparent with their pricing and how it reflects the environmental impact of products or services can build trust with customers. Clear communication about how their pricing supports sustainability initiatives can help differentiate climate tech companies from others.

Final Thoughts

It is important to remember that pricing is a powerful tool that can be used not only to drive direct financial outcomes such as sales and profitability but also has the power to influence perceptions and behaviors towards a more sustainable future. By aligning pricing strategies with environmental and sustainability goals, climate focused ventures can create value for both themselves and society.

By pricing products and services in a way that reflects their true value, climate tech companies can encourage customers to make more sustainable choices and contribute to the global effort to address climate change and other pressing environmental challenges. In fact, as consumers become increasingly aware of the impact of their purchasing decisions, businesses have an opportunity to lead the way in driving meaningful change through pricing.

Ultimately, pricing is not just about setting a number—it’s about sending a message. By using pricing to signal a commitment to sustainability and social responsibility, businesses can inspire others to follow suit and create a more sustainable future for all.

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