Production markups. Markups for the actual higher cost of production for organic materials, including more expensive labor, smaller crop yields, more rearing space for animals, and longer rearing times for animals
Certification markups. Markups as a result of approval and documentation of certification, such as for organic or fair trade
Volume markups. Markups caused by low volumes of organic food compared with non-organic food and the need to keep them separate (reduced economies of scale)

Other brand owner costs are in the range of 10 to 25 percent, and wholesaler and retailer charges are even higher at 60 to 65 percent. The wholesaler and retailer costs include marketing and could also include costs for certification and volume markups for sustainable products (depending on the product and agreements with the producers), but predominantly these costs are multiplying markups of a relative margin.

Interestingly, the costs for sustainable production are mostly in the range of 10 percent of the final product price. Thus, ecologically and socially sustainable production of a wide range of products could occur in the range that most consumers are willing to pay. Costs for certifications are relatively low, accounting for only 5 percent of markups, while the markups for smaller economies of scale differ widely. Surprisingly, the biggest markup of 80 percent for non-food and 70 percent for food products are the result of premium or multiplying markups for brand owners’, wholesalers’, and retailers’ profit margins.

In short, the part of the value chain that has the biggest impact on sustainability for the end product— production—accounts for only 10 to 30 percent of the final product cost. Meanwhile, the biggest markups are coming from steps that have little or no impact on sustainability and are being added as a premium when the products are distributed to consumers.

Revamped accounting logic can create more tolerable pricing

So how can companies lower the markups for sustainable products to reach a range that more consumers are willing to pay? The ideal way to get these premiums under the 10 percent range is to adjust the pricing at the end of the value chain, shifting the corporate thinking and accounting logic from a relative margin to a fixed margin. This would enable sustainable production as a fixed-cost markup instead of being multiplied throughout the value chain.

If markups covered production costs only, prices would be much more consumer-friendly

The success story of product called Fair Milk at the beginning of the last decade is a good example of how brand owners, wholesalers, and retailers switching from a relative margin to a fixed margin can boost sales of milk, providing a fair pay to the dairy farmers. As milk prices steadily dropped in Europe, the farmgate prices paid to dairy farmers no longer covered farmers’ production costs. In Germany, 10 cents more per liter would have been enough for farmers to make a decent living. Thus, Fair Milk was introduced, costing 10 cents more at the retailer. This markup was paid directly to farmers. On a milk pack of 65 cents per liter, 35 cents instead of 25 cents was paid to the farmer, and the retail price ended up at around 75 cents per liter. Two thirds of customers rapidly accepted this. Today’s accounting logic says that the brand owners, wholesalers, and retailers would add their relative margin onto the 35-cent sustainable milk production cost, which would lead to an end retail price rather in the area of €1 or more per liter—a 50 percent or more markup that is above what most consumers are willing to pay.

In general, if a company adds 50 percent to the production cost and then adds all other profit margins, the end product price easily ends up at 50 percent more—far more than what most consumers are willing to tolerate (see figure 5). If brand owners, wholesalers, and retailers added a fixed margin (their absolute monetary profit) and passed along the markup for sustainable production, the end price often would be in the range acceptable to the consumer of around 10 percent more.