Does Corporate Social Responsibility Build Customer Loyalty?

Yes, If It Directly Affects Consumers' Experience With the Brand, New Tuck Research Finds

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Pepsi's Refresh Project funded 238 ideas for improving communities. The company's "human right to water" program pledged more than $15 million for safe water across the world. Walmart has pledged $2 billion in cash and food donations to food banks and, in 2009, it unveiled its Sustainable Product Index.

Like Pepsi and Walmart, many companies engage in a spectrum of corporate social responsibility initiatives and invest heavily in publicizing them. While the intrinsic satisfaction of doing good is important, as author Tim Sanders has argued, CSR programs tend to be meaningful and sustained only when they align corporate financial needs (profit, revenue, growth) with social needs (people, community, planet). So which, if any, of the plethora of CSR initiatives beget positive returns?

The truth is that , until recently, we didn't know.

Several cross-sectional studies spanning firms across different industries have correlated CSR performance with financial performance. The correlation is often positive, but there are also several negative and insignificant effects. Add to these mixed results the ambiguous direction of causality (meaning, does good corporate citizenship lead to better financial returns or do financially sound companies devote more resources to CSR?); the inconsistency among studies with respect to which CSR dimensions do and do not generate positive returns; and that different stakeholder groups respond differently, and it becomes clear that we don't really know much about whether, how, and how much CSR benefits a company.

We set out to answer this question for a major sector of the economy -- consumer goods retail. We collected field data from more than 3,000 grocery shoppers regarding the major grocery retailers in their markets. We measured their perceptions of retailers' CSR on four dimensions, as well as other attributes such as price, merchandise quality, service and assortment. We then estimated a model of how these variables affect consumers' attitudes toward the retailers and their share of wallet. Here is what we found.

First, all four dimensions of CSR performance -- environmental friendliness, treating employees fairly, community support, sourcing from local growers and suppliers -- positively influence consumers' attitudes toward a retailer. But consumers seem to modify their purchase behavior only when the CSR domain directly affects their actual experience with the company or brand. In our context, broad initiatives like environmental friendliness and community support build only goodwill, but initiatives like offering locally sourced products and fair employee compensation -- actions related directly to the products and people that consumers face -- bring both goodwill and a higher share of wallet from consumers.

Second, this economic return is significant and meaningful. For instance, if a retailer is able to improve consumers' perception of its fair treatment of employees by one point on a five-point scale, the consequent increase in share of wallet is approximately 1.7 percentage points. The gain from a similar improvement in local sourcing is even more pronounced at more than 2 percentage points. These numbers appear small, but they represent a sales lift of 10% to 15% for the average retailer in our study.

Third, if a retailer chose to leverage its improved CSR perception into higher prices rather than higher share of wallet, the calculations from our model show that a one-unit increase in employee fairness perceptions translates to a price premium of about 12%, and a similar increase in local product sourcing translates to a price premium of about 16%.

Fourth, much, but not all, of this benefit is direct: Consumers patronize the company because they see personal benefits from the CSR initiatives and because the initiatives resonate with their own values. But an indirect benefit can occur through consumers' perception of how fair the company's prices are. Consumers don't just respond to the price charged; they also respond to how fair they think the price is . High prices are considered fairer if they can be attributed to "good" motives like CSR efforts or costs rather than to "bad" motives like profit-taking. We find that as much as 15% of the share-of -wallet gain from the perception of employee fairness accrues through improved perceptions of price fairness. Like the direct effect, this indirect benefit is not equal across different CSR initiatives. There is no indirect benefit of local product sourcing -- indeed, price fairness perceptions are not better for companies that offer locally produced products.

What does it all mean? Engage in meaningful CSR. Integrate your CSR efforts into consumers' direct experience with your brand, and monitor their response to make sure your initiatives and your message resonate with them. Recognize that just because you spend money on CSR initiatives does not mean the consumer will think it's fair to charge higher prices. But don't shy away from CSR initiatives that have real meaning to consumers even if they are expensive, because the returns in customer loyalty are substantial enough to more than cover those costs.

ABOUT THE AUTHORS
Kusum Ailawadi is the Charles Jordan 1911 TU'12 Professor of Marketing at the Tuck School of Business, Dartmouth College. Jackie Luan is assistant professor of business administration at the Tuck School of Business, Dartmouth College.
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