The Economic Impact of Cause-Related Marketing on Profit Maximizing Organizations and Nonprofit Organizations



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The Economic Impact of Cause-Related Marketing on Profit Maximizing Organizations and Nonprofit Organizations


Emma L. Morzuch

December 2006

Senior thesis submitted in partial fulfillment

of the requirements for a

Bachelor of Arts degree in Economics

at the University of Puget Sound




Thesis Statement:
The economics of cause-related marketing is at an infant stage. I intend to explain the behavior of profit maximizing organizations and nonprofit organizations using basic economic theory.
Introduction:
Cause-related marketing (CRM) is defined as “the process of formulating and implementing activities that are characterized by an offer from the firm to contribute a specified amount to a designated cause when customers engage in revenue-providing exchanges that satisfy organizational and individual objectives” (Varadarajan and Menon, 1988). Cause-related marketing includes product sales, promotions and program-driven collaborations between companies and nonprofit causes. There are seven main types of CRM arrangements. The first five types relate to standard corporate practices, and these include advertising, public relations, sponsorship, licensing and direct marketing. Facilitated giving occurs when a business facilitates customer donations to the charity. The most widely used CRM practice is purchase-triggered donations. This occurs when a company pledges to contribute a percentage or set amount of a product’s price to a charitable cause or organization. This thesis will concentrate on purchase-triggered donations to demonstrate CRM relationships between profit maximizing organizations (PMOs) and nonprofit organizations (NPOs).

Cause-related marketing was first launched by American Express in the early 1980s. Jerry Welsh, the senior vice president at the time, believed that card members would be encouraged to use their American Express cards for local purchases if they had a local cause to support (Daw, 2006). In 1983 American Express expanded the program nationally because of its early success. American Express’s new objective was to increase card use and new card applications and at the same time support the nonprofit Restoration Fund. American Express donated one cent for every card transaction and one dollar for every new card application to the nonprofit Restoration Fund (Daw, 2006). In three months the Restoration Fund raised over $1.7 million, and American Express card use rose 27 percent, while new card applications increased by 45 percent compared to the previous year (Daw, 2006). This cause-related marketing program demonstrated that mutually beneficial relationships could be built between nonprofit organizations and corporations. A 1988 study for Independent Sector reported that cause-related marketing promotions are appropriate and useful, benefiting the corporation, the nonprofit, and the consumer (Wagner and Thompson, 1994). As a result of its apparent success, cause-related marketing grew in the United States from $120 million in 1990 to an estimated $1.08 billion in 2005 (Epstein, 2005). Many manufacturers and retail chains such as Avon, Cadbury, The Home Depot, Target, Timberland, McDonalds and ConAgra all practice CRM. The types of nonprofit organizations that team up with firms are the so-called public benefit organizations. Public benefit organizations are those that serve a scientific, literary, education, artistic, environmental or charitable purpose that benefits the public. In the nonprofit world these are known as “501(c)(3)’s.”





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