Most retail prices are like the tip of an iceberg, reflecting only a small portion of the costs associated with a product. Beneath the surface are myriad hidden environmental and social costs that are not included in the product’s price. Transitioning from a single bottom-line model toward a more sustainable triple bottom line model involves developing pricing and supply chain strategies that reflect true costs.
Each day as individuals and businesses, we make choices about how to spend our money. We identify alternatives and weigh trade-offs in evaluating which choice will best meet our needs. And in the billions of transactions that take place every day one factor in this evaluation process that usually carries the most weight is price – “what will it cost?”
Whether we are aware of it or not, we use “price” as a heuristic device. Price gives us a shortcut since we tacitly assume it represents all of the associated costs of a product or service rolled up into one number. This makes it easier for us to make “apples to apples” comparisons in our purchasing decisions – in theory anyway.
Prices Reflect All Costs – Except When They Don’t
A key assumption that often goes unexamined is that our economy functions according to perfect market theory. In a perfect market, price reflects equilibrium between supply and demand. In a perfect market, buyers and sellers have equal access to all relevant information.
But the perfect market does not exist – except in economics textbooks.
In the real world, whole icebergs don’t float on top of the ocean, and prices are illusions that most of us unwittingly buy in to. But since pricing weighs so heavily in our B to B and consumer purchasing decisions, those companies who benefit the most are often the ones most skilled at pushing as many costs as possible beneath the surface for others to absorb.
Lower prices are good, right? So what’s the problem?
Called “negative externalities” by economists, these are costs that are shifted to those who are not involved in the transaction – pollution being a prime example.
Negative externalities are hidden costs that are not included in conventional accounting methods, so are not reflected in prices.
Why is this important? If prices are inaccurate since they do not reflect true costs, then the basis on which we are weighing trade-offs in our economic decisions is fundamentally flawed. The resulting misallocation of resources leads to what economists refer to as market distortions, or market failures in extreme cases resulting in a “tragedy of the commons” in which environmental and social exploitation can reach catastrophic levels.
The documentary “The True Cost” does a brilliant job of looking at the fast fashion industry as an example of the problem and its devastating human and environmental impacts – a problem that exists in varying degrees across all industries.
What’s a company to do?
- Expand awareness: go beneath the surface and see the rest of the iceberg
“Negative externalities” are much more difficult to ignore or explain away when they take on the face of another living being. This is why documentaries like “The True Cost” and “Cowspiracy” are so important. They reach us at an emotional level rather than an intellectual level. Facts and figures are easy to manipulate and can fall victim to confirmation bias, but empathizing with others based on our common identity is usually the impetus to behavior change.
- Assess your current position on the single bottom line <––> triple bottom line spectrum.
Take 20 minutes to complete the B Lab Quick Assessment
- Study and learn from the examples of those who are on the path to true cost pricing
It’s not easy bucking the status quo, but more and more companies are showing that it is possible to succeed economically while being true to social and environmental values. Companies like Patagonia, Whole Foods, Ben & Jerry’s and Seventh Generation are demonstrating that customers increasingly understand and care about the relationship between price and social and environmental impacts. And Puma has taken a leadership role in moving to a full cost accounting methodology for others to emulate.
Ultimately, a company’s pricing and procurement strategies offer good litmus tests on how how it is balancing economic, environmental and social factors within a triple bottom line framework.