In 1976, the Marriott Corporation was trying to figure out how to spread the word about its soon-to-be-opened family entertainment center in California, Marriott’s Great America. The company’s marketing department decided to forgo its typical approach, and instead partnered with the March of Dimes, a nonprofit that works to improve the health of mothers and babies.
One of the charity’s main fundraising tools was pledge drives by kids in middle and high school. The problem was, the kids often failed to submit their funds by the deadline. With their shared audience of adolescents and teenagers, the two organizations realized they could help each other by collaborating on a marketing and fundraising campaign. So Marriott created a contest, in 67 cities in the western U.S., where the person or team who brought in the most money for March of Dimes by the deadline would win a trip, with 100 of their friends, to the new Marriott’s Great America. The effort was a resounding success, raising an unprecedented $2.4 million for March of Dimes, and helping the entertainment center achieve 2.2 million visits in its first year of operation, a regional theme park record.
Today, that partnership is recognized as the first “cause marketing” (CM) campaign in U.S. history, and it started a trend that has ballooned tremendously over the past 45 years. In 2018 in North America, firms spent roughly $2.14 billion on CM campaigns, representing an annual growth rate of 4.4 percent. Some of the more famous CM campaigns include the one by Ethos Water, which contributes five cents per bottle to help water-stressed countries, and Gap’s promise to donate 50 percent of profits from Product Red items to the Global Fund to fight AIDS.
Tuck professor Praveen Kopalle has been following this marketing development for some time, and it raised a question in his mind about the regulation of CM campaigns. These campaigns vary significantly in their transparency and specificity, and it would be relatively easy for a firm to overstate the amount it donates to charity. This came up in 1999, when Yoplait ran a promotion to help the Breast Cancer Research Foundation, promising to donate 50 cents per yogurt lid to the organization. Yoplait failed to notify consumers of a cap on the donation amount, which led the State of Georgia to file suit against Yoplait’s parent company, General Mills. Georgia won the lawsuit, and General Mills was required to donate an extra $63,000 to the charity.
Strict enforcement causes the firm to act virtuously, which in turn generates more donations through the campaign, higher profitability, and a surplus that the regulator can use to improve society.
As Kopalle studied this topic more, he discovered some concerning characteristics of CM. First, firm behavior varies a lot: some firms promise to donate a specific amount per unit sold, while others are more vague. Second, the U.S. has a patchwork of CM regulations: 24 states and Washington D.C. have laws regulating commercial co-venturers (CCVs) or firms that conduct charitable sales promotions, with disclosure requirements that vary from strict to lenient, while the other 26 states don’t regulate CM activity at all. And finally, the nature of donations from CM campaigns begs for scrutiny. Unlike products, whose quality can be independently verified by sources such as Consumer Reports, consumers have no way of measuring if firms are being truthful about their donation claims.
An analytical modeler in marketing, Kopalle thought he could contribute to this area by creating a game-theoretical model for the interaction between regulators and firms engaging in cause marketing. In a new working paper—“How Does Regulatory Monitoring of Cause Marketing Affect Firm Behavior and Donations to Charity?”—Kopalle and coauthors Aradhna Krishna, Uday Rajan, and Yu Wang use a Stackelberg leader-follower model to study that very relationship. Importantly, the model accounts for the perspectives of both the regulator and the firm. As they describe in the paper, “The regulator must consider the benefit of a donation amount to charities against the cost of enforcing CM, as well as the likelihood of successfully extracting a penalty from a violating firm. Meanwhile, a strategic firm with a strict regulator will consider the benefit of overstating to customers about the amount it donates—which is the increase in consumer goodwill (and product demand)—against the expected cost of a penalty it may be fined if it is found in violation by the regulator.”
Modeling different scenarios—regulators that are strict or lenient, and firms that are virtuous or strategic—the coauthors find that CM can be a win-win-win if regulators strictly enforce transparent CM laws. In this case, the strict enforcement causes the firm to act virtuously, which in turn generates more donations through the campaign, higher profitability, and a surplus that the regulator can use to improve society.
“The key is to make sure the law has enough teeth,” Kopalle says. That’s not necessarily easy. National campaigns are expensive to regulate by any one state, with the cost potentially exceeding the public benefit to that state. As a solution, Kopalle suggests states band together to share the costs of enforcement. When firms see states working together on enforcement, they are more likely to accurately report their donations.
Kopalle ends his paper on an upbeat note, stating that with proper regulation, cause marketing can lead to better marketing for a better world. “Although much work remains to be done,” he writes, “the concept of strategic management of charitable donations seems viable and worthy of the effort to understand it more fully.”