Shrinking revenues doesn’t have to mean shrinking product sizes.
You might have noticed grocery prices are soaring, or your usual go-to pack of chips is shrinking in size—all thanks to massive inflation. As of August 2022, the U.S. consumer price index (CPI), which measures the change in consumer prices for a specific set of goods over a period, has increased by 8.3% (year-on-year). Although it has gone down slightly from 8.6% in May, the highest it has ever been since 1981, it remains high and worrying. Likewise, inflation rates are rising substantially worldwide, hitting 9.1% in Europe and 7% in India as of August this year.
Inflation is certainly not good news for businesses because it increases operating costs. When raw materials, labor and energy are becoming more expensive, companies have to absorb additional costs to retain customers. To accomplish this, companies might reduce product size, known as “shrinkflation”. Let’s take a closer look at how shrinkflation happens, how it affects shoppers and the different strategies companies can use to avoid shrinking product sizes.
Understanding shrinkflation
Coined by British economist Pippa Malmgren in 2009, shrinkflation is a portmanteau of “shrink” and “inflation”. It refers to reducing the size of a product to ensure that the customer can still purchase it at its long-standing value.
Also known as package downsizing, shrinkflation is not a new strategy; it tends to proliferate when inflation is high. In the 2008 recession, many companies adopted packaging shrinking as a tool to tide their businesses over. According to a UK’s Office for National Statistics study, the prices of 206 items shrunk between 2015 and 2017.
The main reason companies opt for shrinkflation to keep providing their products at the same price is because customers are more sensitive to price changes than package downsizing. Many companies believe customers won’t notice minor changes in the weight and size of the product and further attempt to hide the changes via packaging changes. Moreover, changing prices, particularly in a sector with massive competition, can bring down revenues.
Similar to shrinkflation, “skimpflation” is another tactic to counter rising costs by lowering product quality to maintain the same market price.
Shrinkflation can negatively affect brands
While changes in product sizes or quality are not noticeable immediately, they eventually become a big topic of discussion among customers and negatively affect brand image and loyalty.
For instance, on Reddit, there is an entire subreddit called r/shrinkflation dedicated to pointing out the downsizing of various products. The subreddit has posts after posts observing the sizes of products offered by the retail company Walmart, the chocolate manufacturer Hershey’s and the fast-food chain Wendy’s, to name a few. These posts are calling out companies’ sneaky tactics to hide shrinkflation.
In one of the posts, user gyg231 uploaded the image of Double Stuf Oreos and points out that “extra size” or “more of what you love” are “big red flags” of corporations trying to skim on consumers.
When customers eventually realize a product isn’t lasting as long as it used to, they will switch to other brands that offer more economical products. According to a survey conducted by American business intelligence company Morning Consult, 48% of American shoppers have chosen to buy different brands when they experience the shrinkage of products.
Not only will brands end up losing repeat and recurring customers, but they will also make a dent in their wallets to make the product shrinkage seem inconspicuous. While the company might profit from shrinking the product’s size over time, it would be expensive for them to change the packaging, at least in the beginning.
What can companies do to maintain margins besides shrinking products?
Instead of shrinking their products time and time again, companies can use different strategies to deal with inflationary pressures. These alternative strategies might be a better way to maintain customer loyalty and avoid getting the flak for shrunken product sizes.
One way to maintain prices is by creating bridge packs that are priced somewhere between the current offers. For instance, Hindustan Unilever said they were offering a new size of Lifebuoy soap packs between INR5 and INR10. It would help them maintain affordability and give manufacturers scale.
Another tactic that companies can employ is creating value packs. During inflation, consumers begin buying products in bulk to reduce the number of shopping trips they need to make, thereby cutting down on fuel costs and the price per unit of the product. Hence, companies can increase the prices while creating a unique product offering that attracts the value-conscious customer.
Finally, companies with a firm position in the market can also increase product prices. This is especially true for concentrated markets with little to no competition between companies.
Product sizes/weights change all the time
No customers want to spend more money on essential items in our everyday lives. Yet, we need to realize that companies frequently change product sizes and weights, irrespective of inflation. They also have different pricing strategies for different-sized products. It basically means that a family-size bag of chips will have a different price per unit compared to a smaller bag. They don’t always mean to be an underhand attempt to cheat customers; instead, these strategies are based on consumer research and the market’s responses to these products. Sometimes, customers can even get a better deal for their money from a more expensive product but with greater grammage.
So, before you get mad at your favorite chip brand for changing packages, check the price per unit and pick a pack size that gives you the best deal!
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Header image courtesy of Freepikf
