Last October, Brian Linton was reviewing the budget for his apparel company, United By Blue, when he noticed something was amiss: The company's wholesale margins had shrunk—from 60 percent to just 15 percent.

Linton's Philadelphia-based business makes high-quality organic T-shirts. It also promises that for every product sold, it will remove a pound of trash from rivers, oceans, and beaches by organizing cleanup events. The shirts, and the mission-based pitch, had won an enthusiastic reception from retailers, including Urban Outfitters and Whole Foods. But the numbers on Linton's spreadsheet told a grim story.

Linton considered his options. At $29.50 each, the shirts were already pricier than most. A price hike would probably alienate the retailers he had worked so hard to court. But Linton couldn't bear the thought of compromising his company's initiatives. In his mind, the mission had always been every bit as important as the money.

1. The Backstory

Buy a shirt. Save the world

Linton graduated from Temple University with two passions: entrepreneurship and water conservation. He was appalled by the fact that an estimated 14 billion pounds of trash are dumped into oceans annually. So when he founded United By Blue in 2010, he was determined to use the business to make a difference by connecting every sale to a cleanup project. It would be good for the environment—and for marketing.

He designed a line of T-shirts, found a manufacturer in India, and began cold calling retailers. A year later, the shirts were in 175 stores, including six Whole Foods and 20 Urban Outfitters locations.

As the company grew, however, Linton learned how much plastic actually went into packaging and shipping. It was hypocritical, he thought, to brag about removing trash from the ocean, only to create mountains of garbage elsewhere. The company soon began using banana-fiber paper packaging, hang tags made of elephant dung, and twine, not plastic, to attach the tags. By the fall of 2011, the company had reduced its plastic use 80 percent.

2. The Problem

The high cost of doing good

The banana-fiber bags alone cost 50 cents each—50 times the cost of plastic. Making matters worse, cotton prices hit a 140-year high in 2011, just as United By Blue upgraded from traditional jersey cotton to softer, more expensive slub cotton. Linton had factored none of that into his prices. Shirts still wholesaled for $14.50 apiece, and some clients, especially big ones, were paying even less.

Sitting at his computer on that October day, Linton turned to United By Blue's director of cleanups, Mike Cangi, and told him that if something wasn't done, United By Blue would be out of money in less than six months.

3. The Options

A Sobering Realization

Linton and Cangi began exploring packaging alternatives, such as tissue paper and biodegradable plastic, but tissue paper was too weak, and biodegradable plastic could melt on a hot container ship. They also discussed the cleanups. Costing $2,000 to $5,000 each, they were a huge expense for a start-up with sales just shy of $1 million in 2011. But the cleanups were part of the company's DNA; without them, Linton would be just another guy selling T-shirts.

They realized that prices would have to go up. Linton crunched the numbers and came up with a new retail price: $34. The problem was that that figure would probably lead Whole Foods and Urban Outfitters—two accounts that made up 25 percent of United By Blue's revenue—to drop the shirts. "Large retailers want discounts and margins around 60 percent," Linton says. He had negotiated with those companies and knew there was no way they would budge. And revenue wasn't all United By Blue stood to lose. Having big-name retailers on board was a key selling point when meeting with other potential sellers. "It helped us build legitimacy," Cangi says.

Cangi also feared that the big chains wouldn't be the only ones to drop the brand.

4. The Decision

Bracing for the worst

Cangi began e-mailing retailers, asking for feedback. "I think $34 for a T-shirt is too expensive," one merchant replied. Others, especially those familiar with higher-end brands, were less discouraging.

Finally, in December, Linton tested the waters by increasing the price of the shirts to $34 on its website. After a few weeks with no complaints, he and Cangi began notifying retailers by e-mail. "Since you have been carrying United By Blue, you have seen our shirts transform into what they are today," the e-mail read. "Unfortunately, all of the work that we have put into making the best quality and most sustainably packaged products we can has resulted in increased costs. Beginning with our Spring/Summer 2012 shipment, our wholesale price for shirts will be $16.50 and MSRP will be $34."

They crossed their fingers and awaited the outcome.

5. The Aftermath

Some bad news. And some good news

About 40 stores, including all Whole Foods and Urban Outfitters locations, dropped the brand. "I love what you guys are doing, but $34 retail is too much for our stores," a buyer from Urban Outfitters wrote in an e-mail. But in January, Linton and Cangi attended the Outdoor Retailer trade show and had no such problem. "We're in an affluent area," says Sarah McDonald, manager of Trail Creek Outfitters in Glen Mills, Pennsylvania. "It was a price increase we could sustain." Meanwhile, the premium price got the attention of a number of higher-end retailers that saw the company's mission as a key selling point. "I was attracted to the shirts' aesthetic," says Michael Druskin, CEO of Len Druskin, a chain of boutiques in Minneapolis. "But once I heard the story behind them, I was really impressed." United By Blue's shirts will hit Druskin's stores next month.

5. The Takeaway

Welcome to the high end

The price increase raised United By Blue's margins to 30 percent, and by this summer, the company's shirts—as well as new items such as bags, jewelry, and sweatshirts—will be available in 200 stores.

Still, Linton will have to see how well the T-shirts sell this spring and summer before he is prepared to deem the price hike a success. If all goes as planned, he expects sales of about $1.5 million this year. In the meantime, he continues looking for ways to cut manufacturing and cleanup costs. By the end of 2012, United By Blue will begin manufacturing in Los Angeles, which will save the company money on transportation and import taxes. United By Blue has also found partners, including Cascadian Farm Organic and EcoSmartPlastics, to donate food and supplies to cut the cost of the cleanup projects.

Linton is glad he didn't backtrack on his environmental mission—and not just because it's a selling point to high-end boutiques and outdoor retailers. "If we had compromised," he says, "our brand would never have recovered."

The Experts Weigh In

A Missed Opportunity

Linton made the decision I would have suggested if he were my client. Yes, United By Blue lost two retail partners, but they weren't the right partners for a premium brand in the first place. That said, I think they missed an opportunity to explain why the shirts cost $34. They need to do a better job of telling their story through social media and on their website. What does a pound of garbage look like in the ocean? People who are looking for premium, sustainable brands want to know that story.

Rob Sinclair | Founder | Conscious Brands, Calgary, Alberta

Nice Niche

United By Blue's social mission was always paramount, and because of that, I believe the course of action was correct. Playing in a higher-priced niche can be a very successful move—and it actually enhances the brand to be more mission focused. The company has proved it's not engaged in greenwashing. The majority of enterprises with social missions sell premium products—because the cost of the social mission is baked into the purchase price—and customers understand that.

Bruce Usher | Co-Director | Social Enterprise Program

Columbia Business School

Time to Diversify

This was a tragedy of bad planning that I see often, and I don't think United By Blue is in the clear yet. The high-end sales cycle can be hard, because you're selling niche boutique by niche boutique. I'd like to see them diversify with a low-end product for mass-market stores and a high-end product for niche boutiques. Many good clothing designers have done it. That's why you've got Donna Karan and DKNY. That way, you can get high-volume sales at a low margin to balance out the long sales cycle associated with high-end boutiques.

Kevin Jones | General Partner | Good Capital, San Francisco