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Marketing with NGOs: Polishing Your Reputation or Guilt by Association?

Posted on 6/6/2019 9:29:32 AM By Ujjval Vyas
  

In my most recent blog post, I encouraged product manufacturers in the adhesives and sealants sector (and product manufacturers in general) to make ethical choices when selling to customers who may be incapable of distinguishing helpful product information from misleading claims.  In this post, I suggest that there is another important piece of the ethical puzzle: seeking to associate positive attributes to a product set or brand by involving or coming into a relationship with an NGO.  While such attempts to create an aura of cultural prestige, social involvement, or environmental engagement can answer the call of a fad or fulfill the desires of a target audience, they can also put a company at odds with its own best interests or damage its reputation.

It is useful to review the primary reasons that marketing exists at all.  Though marketing is often seen as a way to influence customers to purchase products, this is not very precise and gives no sense of its vital role in market economies.  The core ideas were set out in 1961 by future Nobel-winning economist George Stigler in his famous article “The Economics of Information.” In the article Stigler set out the key idea that information is the basis of all activity in an open market. Markets are created by basic desires and needs of individuals, but the range of desires and needs varies greatly for all kinds of reasons, from arbitrary preferences to endogenous and exogenous constraints.  Combine this variation among individuals with the vast variety of producers and sellers in the market, and Stigler’s formulation takes on the nature of an obvious truth.

In all open or partially open markets, buyers and sellers must find each other and pay a search cost in the process.  These search costs involve placement of information into the stream of commerce by the buyer and/or seller to consummate the transaction that will fulfill the desire or need of the parties.  Buyers and sellers are willing to pay the price for producing information or acquiring information so that the voluntary transaction can be completed (Non-voluntary transactions have no need for information transfer between buyers and sellers: the buyer must accept whatever the seller provides or abstain from the market altogether.)

For buyers and sellers, finding each other is a much harder task than is commonly imagined.  The real value and force of Amazon or Uber rests precisely in their being able to decrease this search cost per unit transaction between buyers and sellers.  In fact, the internet can be seen primarily as providing a mechanism for information exchange that enables many more transactions—and transactions that were once prohibitively expensive—to take place.  Purchasing a used stainless-steel tank from an industrial facility in Malaysia would have been far too difficult and time consuming in the past.  Now, with the help of the internet, these types of transactions take place regularly.
But not all information is the same. Information can be reliable, but it can also be ambiguous, untrustworthy, or even fraudulent.  And when information is not reliable, search costs escalate.  A pricing signal from a commodity market that is cleared on a daily basis and is made up of many, many buyers and sellers is the most reliable.  In addition, such commodity markets entail the lowest search costs for both the buyer and the seller.  This is why they are preferred over other commodity markets and why, over time, those markets that can be commoditized migrate to this type of information system to consummate transactions.  

As markets become more efficient, by which we mean that search costs (often called transaction costs in economic parlance) are reduced to the lowest optimizable level,the margins become by necessity reduced to the minimal possible to obtain a profit commensurate with current costs and risk premiums for the producer entity.  This last attribute means that only the most efficient entities can continue to sell into these markets.  This provides maximum benefits to society at large but often leads to the secondary necessity for hyper consolidation into a few large entities or cartels as the natural way to manage the associated risks.  This is the primary reason that “big businesses” arise.   

Of course, not all markets are commodity markets and not all products may become commodities due to secondary attributes or constraints such as functionality differences, regulatory requirements, geographic realities, or time constraints.  Most importantly, there simply may not be enough buyers and sellers for the core commodity attributes to arise.  These other markets (the luxury market being a clear example) may look very different in many respects but in terms of information exchange, they are the same.  In fact, they necessitate additional search costs because it may be harder for buyer and seller to find each other.

One final attribute must be addressed,which brings us back to the issue of NGOs.  Functional attributes, geographical issues, or shipping costs may be provided with generally empirical confirmation.  But intangible attributes associated with risk and reliability cannot be so easily understood.  This leads marketing personnel to send a signal into the stream of commerce that conveys positive attributes of the company that fulfill the need for this intangible information, often characterized more generally as trust.  Information regarding trust is not required in commodity transactions precisely because the clearing market provider bears all the costs of such risk-of-trust breaches.  If they aren’t dealing in commodities, many companies attempt to create an aura of trust by tying their name to NGOs (as they did in the past with charities or celebrities).  The idea is that if company “X” supports, is involved with, or displays the logo of the Sierra Club, the U.S. Green Building Council, or whatever group is found to be useful for the company to communicate “trustworthiness,” customers will choose the company’s product because of the NGO association.  This form of mutual activity between a company and an NGO can be beneficial or detrimental depending on the vagaries of each party’s public perception.

Our concern is how companies ethically choose the NGOs to support. Unfortunately, NGOs as third parties putting information into the stream of commerce may decrease the overall costs to society for buyers and sellers to find each other, or they may do the opposite.  Ironically, to the degree that NGOs are in the business of polluting the stream of commerce to slow or prevent such proper transactions, they are wasting societal resources.  For example, when a manufacturer that produces a product that cannot by its nature have any genetic modification associates itself with an anti-GMO organization and prominently displays an NGO “certification” of being “GMO-free,” society pays an additional price both by the possibly unscientific demonization of GMOs and the overall loss of information transparency.

Whether as an unintended consequence of good intention or as an outgrowth of a calculated decision by the marketer, the result of this is that the company is again “fooling” the buyer with polluted or unreliable information.  The fact that this may work very well with ignorant or vulnerable consumers is the source of the ethical problem.  Associating with NGOs, who are for all intents and purposes lobbying organizations, poses significant ethical challenges that are far beyond short-term associations to raise sales.  Many marketing personnel are convinced that getting customers, maintaining share, or preventing competitor sales is their reason for being, but they should think more carefully about what kind of information they put into the stream of commerce and if this information may be detrimental to the company’s long-term reputation for reliability and trustworthiness.  It is certainly detrimental that society as a whole must now bear the resource waste associated with unscientific or confused policy positions of many NGOs.  

My previous article encouraged companies to take an ethical approach to how they provide information about their products to customers.  In the same way, companies can extend their ethical approach to customer information, protect their reputations long term, and even contribute to the health of markets by carefully considering the claims that an NGO makes before entering into an association.

(1) Stigler, George J., “The Economics of Information,” The Journal of Political Economy, Volume 69, Issue 3 (June 1961), 213–225.



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