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April 25, 2011 | Opinion

Can a Kinder, Gentler Company Earn a Bigger Bottom Line?

Corporate social responsibility, says Ray Fisman, can help companies earn consumers' trust, and perhaps even higher profits.


Is it really possible to do well by doing good — to save the world and earn more money as a result? This apparent free lunch may be possible if today's conscientious consumers seek products made by kinder, gentler companies — and are willing to pay a premium for them.

While an appealing argument to proponents of corporate philanthropy, it’s a proposition that hasn’t been well examined, in large part because measuring the impact of philanthropy on profits is not a straightforward matter. For example, the fact that a profitable company is also a good citizen isn’t very revealing — it could be, as Milton Friedman suggested in an influential essay in 1970, that the company fritters away shareholder value by trying to save the world rather than giving money back to shareholders.

With some new research with my colleagues Dan Elfenbein of Washington University and Brian McManus of the University of North Carolina at Chapel Hill, in collaboration with eBay, we are hoping to bring some facts to bear on a discussion that has been largely dominated by rhetoric and assertion. By analyzing hundreds of thousands of eBay listings, we find that consumers are more likely to purchase products from sellers that bundle their listings with charitable contributions, and are willing to pay higher prices for these charity-linked goods. But not enough to make up for the cost of the contribution itself. So while philanthropy may be good for business, it may not be good enough to justify its costs.

Through its Giving Works program, eBay offers its sellers the opportunity to give a fraction of their auction proceeds directly to charity. These charity auctions feature a small blue and yellow ribbon denoting its Giving Works status and appear alongside other listings in eBay searches. Since the program is administered by eBay, it’s completely transparent how much is being donated and where the money is going.
 
The program began in 2003, and in the years that followed, sellers were apparently curious about how bidders might respond to charity tie-ins. To figure it out, they put up nearly identical listings — same title, same sale price, and so on — distinguished only by their Giving Works status. This seller experimentation yielded an enormous database to help us understand how consumers value seller charity.
 
Turns out — based on our eBay evidence — the champions of corporate philanthropy have gotten the story at least half right. Take a Giving Works item advertising that 10 percent of proceeds will be given to charity. It’s nearly 20 percent more likely to sell than its noncharity twin at a price that’s about 2 percent higher. (Items where 100 percent is donated to charity — hardly a sustainable business strategy — are nearly 50 percent more likely to sell and result in sales prices that are 6 percent higher).
 
Not all sellers benefit equally. Inexperienced sellers in particular, with little feedback or track records as reliable vendors, profit much more from their charity tie-ins — a boost in sale probability of more than a third, with an extra 4 percent added to the price.
 
Why should eBay consumers be particularly sensitive to the magnanimity of unproven sellers? Most purchases — and those via online vendors in particular — require some level of trust that the goods (and their delivery) will be as advertised. If a charity tie-in indicates an honest broker, it may be a more useful signal for less prolific sellers than for experienced ones, whose history of positive feedback serves as a credible sign of dependability.
 
Why, then, wouldn’t all young sellers — whether honest or devious — tack on charitable contributions to their eBay listings? It turns out that the benefits — in terms of moving inventory and generating higher prices — aren’t enough to cover the 10 percent contribution itself. So an entirely venal merchant would still be better off just taking a lower selling price, but keeping it all for himself.

In considering the implications for corporate philanthropy beyond eBay, it’s worth noting that many giving programs aim to bolster companies’ reputations over the very long run. Our analysis won’t capture this sort of “brand investment.”

It’s also critical to remember that timing matters. In the months after Hurricane Katrina made landfall in August 2005, there was a big boost in sales probability and price for Giving Works for all eBay sellers, young and old. (In much the same way, Walmart generated a lot of goodwill and great PR for being at the forefront of Katrina relief efforts.)

We are in the midst of a similar outpouring of generosity to aid Japanese tsunami victims, and while we have yet to run the numbers, our earlier results suggest that whenever a spotlight shines a light on a particular cause, consumers confer outsized rewards on companies that rise to the occasion.

More than anything, we hope that our analyses push other companies to follow eBay’s lead in being more analytical in assessing the impact of their giving programs. This certainly isn’t to suggest that programs that don’t add to the bottom line should be dropped by corporate America. But it’s best to be honest about whether you’re doing well by doing good, or simply doing good for its own sake.

Ray Fisman is the Lambert Family Professor of Social Enterprise in the Finance and Economics Division, a Bernstein Faculty Leader at the Sanford C. Bernstein & Co. Center for Leadership and Ethics, and the director of the Social Enterprise Program at Columbia Business School.

A version of this article originally appeared in Forbes.


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