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Another Benefit to Cause Marketing: Better Supplier Pricing

Two professors at the Ohio State University have a new take on the benefits of cause marketing; it helps keep supplier pricing in check.

Their paper, called “A Supply-Side Explanation for the Use of Cause Marketing” by Anil Arya and Brian Mittendorf, starts with the proposition that,
“firm profits under simple(non-strategic) corporate philanthropy wherein the firm pledges a donation amount to charity. The paper then demonstrates that the firm can achieve the same donation level while also cutting supplier costs by tying donations to sales. Such a cause marketing tie-in intrinsically undermines the per-unit profitability of each product by adding a new marginal cost of sales. As such, the cause marketing pledge makes the firm's input demand much more sensitive to supplier pricing. This increased sensitivity to pricing persuades the supplier to charge a lower price so as to boost demand for its input. In effect, by engaging in cause marketing, the firm is able to make the supplier a tacit (even if unwilling) partner in corporate philanthropy.”
In other words, Yoplait must demand the best pricing from its milk and fruit providers because it is donating $0.10 per lid redeemed. Arya and Mittendorf say that even if the cause marketing promotion doesn’t improve sales volume, “the firm’s bottom line is improved by targeted philanthropic activity.”

They also advise companies not to make their cause marketing universal. By sacrificing the profit margin on the product with the cause-marketing tie-in you can run up the margin on other products because of the firm’s overall lower supplier costs. So Campbell’s Labels for Education and General Mills’ Boxtops for Education are probably too broad to benefit from supply side cost savings.

Old gray-haired cause marketers like yours truly always said that cause marketing was especially well-suited for highly competitive markets because it helps firms stand out. But Arya and Mittendorf say that from a supply side point of view, competitive markets have probably already wrung out most of the costs savings out of suppliers. Cause marketing is therefore less likely to help in competitive markets.

There’s a lot of counter thinking here, making the paper an interesting read. I use the term ‘read’ advisedly since I’m not qualified to comment on Arya and Mittendorf’s mathematical model.

But as a gray-haired cause marketer it reminds that cause marketing has long been about power relationships. In the early days of cause marketing, which was dominated by consumer packaged goods (CPG) promotions at retail, stores would give preferred placement to CPG companies that ponied up cash donations to preferred charities. That kind of promotion is less common today. It’s considered unethical by many store chains. But as with Arya and Mittendorf's paper it does show you who has the power.

Comments

David Hessekiel said…
Paul,
At first I was excited to see your write-up of this research, but when I read the paper itself it turned out to be a totally theoretical piece of work with no effort to substantiate the hypothesis with real world examples of better input pricing obtained by cause marketers.
The researchers could have substituted any form of promotion (entertainment tie-in, premium) that increased a marketer's costs and assumed that the marketer would go back to suppliers to demand better input pricing.
Am I missing something?
Hi David:

No, I don't think you're missing something. What the authors did is a fancy thought-experiment, leaving it to others to parse out actual proof.

Thanks for your comment, brother.

Warm regards,
Paul

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