Can cleantech depend on "High Willingness to Pay"?

In strategy class last semester, I understood the concept of business dependency on high willingness to pay or low cost to be profitable. High willingness to pay products are items that command a price premium for superior product quality, durability, customer service, uniqueness, social stature, or other reasons (i.e. Apple, Honda, Rolex, Mont Blanc). Low cost products are items that compete on price by cutting costs through innovative processes, exclusive supplier relationships, off-shore manufacturing, reducing inventory or other approaches (i.e. Food, Airline tickets, Gasoline, Electricity). Can cleantech move into the high willingness to pay category instead of the low-cost category?

Yes, only if businesses are able to provide some value for the price premium. The Toyota Prius, which is 40% more expensive than a comparable car, has done it by giving social stature, an intangible value, to the car owner - "A green person". On the other hand, highway driving habits of the car owner have remained at 75 mph (for almost all Americans) even though fuel consumption is 20% lower at 55mph. Is the person really "green"? measuring by social standards, the answer is probably yes. Why? My contention is that one action (buying Prius) is visible and the other action is invisible (driving habit) to the car owner's social circle of friends and family. Therefore, cleantech businesses can depend on high willingness to pay as long as they can make their product visible to a customer's social circle.

Granted that I was not the most attentive student in Strategy class, I do appreciate the concepts in hindsight (as you can see above). All potential MBA candidates out there, rest assured that lack of attentiveness will get you cold called in class :) And so, I was cold called in strategy class during the discussion of PIE (Potential Industry Earnings) and High willingness to pay. This instance sticks out most in my memory because I fumbled through some non-coherent responses leading to some awkward glances and a final comment from our Professor - "This discussion is not being productive, we need to move on." Everyone in class got a good chuckle out of it :)

Start-up businesses need to be aware of the above concept and have to (in my opinion) accomodate this thinking in their business model. It will make their business profitable sooner, more attractive to investors and sustainable in the long term. 

Comments

[Venu B]

Varun,
You have a valid point in that individuals are likely to pay a premium to express their social status. I’m not sure about people wanting to pay premium on clean tech generated energy. Unless the price difference between clean and dirty energy converges it would be a hard sell for individuals (or large corporations) to switch over to cleaner tech generated energy. The success of Prius can be attributed, in part, to the long-term cost savings from reduced gas usage. The same can be said for Apple computers. On Average, apple computers are about twice as expensive as PCs but, they have a longer life period. I have had to invest in two computers over the last three years while I know a friend who’s been using his MacBook pro for the last four years with no major issues. My point, I suppose, is that individuals and corporations will only be willing to pay a premium if they see long term cost savings.

Anyways, thanks for maintaining this blog. I'm interested in an MBA and want to focus on the Alternative Energy space and this blog gives me an opportunity to understand that industry through your experience. I reckon you’re currently in Eastern Europe, hope you have a good time. Looking forward to your future posts.

Cheers,
Venu.

[Varun Dhanuka]

Venu, Thanks for the comments. Just a quick thought, I agree that the Prius reduces gas usage but there is much debate on it generating cost savings. First, the Prius is approx. $6000 more expensive than a comparable car in its class. Second, the Prius battery pack which costs $3000 (not including labor) needs replacement every 100-200k miles.

[Venu B]

Varun,
Good point about Prius. I still haven't done the numbers on Prius. As an urban dweller for the past 5 years the only car I've seen is a subway car ;)
My point, however, is that for any new clean tech product to be successful it should offer a combination of benefits for a customer to pay a premium. Certain products definitely underscore social status, but there are implicit benefits associated with their brand. After all, the reason we pay a premium for Mont Blanc or Apple is that these products offer something other than a social symbol, longevity.
If you haven't read the book Tipping Point by Malcolm Gladwell, I'd strongly recommend this book to you. There is usually an underlying rationale for the success of the products and Malcom Gladwell does a great job explaining and investigating the popularity of certain products.

Cheers,
Venu.