BrazilNavigating the Margin Growth Paradox: Balancing profit and planet
As an economic crunch meets the need for green transformation, commercial directors and pricing leaders are facing a crucial dilemma: How can companies optimize pricing while sticking to sustainability targets? A new report from PwC explores this so-called ‘Margin Growth Paradox’.
The prevailing global economic landscape has been plagued by instability in recent years. There is stubborn inflation, dwindling real income growth, and a growing number of ongoing geopolitical conflicts that often negatively impact supply chains.
With the climate crisis leading many stakeholders to call on companies to commit to bold sustainability goals, profit margins are being squeezed to the limit in many cases. This is the ‘Margin Growth Paradox’ – the struggle to continue investing in sustainability while also sustaining profit margins.
The reality is that more sustainable products are generally more expensive. This is a problem for consumers that are facing the pressures of inflation and less spending power. “While consumers claim to prefer sustainable products, they often choose affordability, convenience, and quality,” said Jennifer Nelen, partner at PwC.
“This challenge is further complicated by increased costs for companies due to inflation and stricter environmental regulations. Companies poised for success are those that deeply understand customer behaviors and needs, and continuously adapt their commercial and operational approaches accordingly.”
These overarching economic problems also create what the report calls the ‘green consumer paradox’, in which consumers’ intentions do not always match their actual purchases. Many consumers will inevitably prioritize price and value over sustainability when making buying decisions.
While the increasing willingness to pay for more sustainable options means greater potential for value creation, many are simply unable to pay, with a total of 64% of respondents surveyed by PwC telling the authors that economic pressures are their top concern. That means that consumer preference for sustainable options will only benefit companies if they can afford it.
Precisely because consumers increasingly want sustainable products, many companies are investing in climate-friendly practices, with some even seeing increased revenue as a result. However, stricter regulations and rising production costs, worsened by inflation, make it expensive for businesses to become more sustainable.
Many companies now view sustainability as an imperative, rather than just an added plus. That is partially because of strict regulations that need to be complied with, especially in Europe, but also because stakeholders are increasingly demanding sustainability.
Value Proposition
“Companies that have a detailed understanding of consumer behavior and needs and continuously adapt their commercial and operational approaches accordingly will be more successful than others in current market conditions,” said Nelen.
Key to getting this right is designing the optimal Value Proposition. This may require tweaks to existing models, but also a more comprehensive shift. “An effective route to tackle this shift is through innovative Business Model Reinvention. This goes beyond traditional revenue and cost considerations and optimisation alone, but involves transforming the way companies create, deliver and capture value. It is a strategic process that fuels innovation, agility and sustainable growth.”
