Shrinkflation: a smart way to implement higher prices?
Some highlights from a recent webinar shared by Professor Kathleen Cleeren
What is shrinkflation?
Instead of increasing price for an existing SKU (say from 1.29 to 1.49 for 100g of chocolate), an alternative strategy is to reduce pack size so that the price per volume unit increases. The actual pack price may remain unchanged, increase or even decrease (but relatively less than volume). Shrinkflation only occurs if the new pack size replaces rather than complements an existing one and if the pack size is small enough to go unnoticed.
In contrast to additional pack sizes that might signal more variety and hence added value, shrinkflation usually flies under the radar and provides no added consumer value. However, consumers or consumer advocate groups may publicly complain if the “hidden” price increase is substantial.
How shrinkflation might affect sales
Multiple consequences of reducing pack size are possible:
- Households keep buying the learned number of units which decreases overall volume sales and may or may not reduce value sales (depending on the price increase).
- Households buy more units (to get to a desired total volume) which will result in equal or higher volume sales and higher value sales.
- Households buy fewer units (or in the extreme case: stop buying the SKU) which decreases both volume or value.
Top reasons why reaction (3) is rather rare:
- Consumers only notice a price increase if large enough (known as Weber’s law of just noticeable differences). Because absolute prices tend to remain stable or may even decline in shrinkflation strategies, noticeable price increases are unlikely.
- Consumers concentrate more on SKU prices and less on prices per volume unit (Homburg et al., 2005).
What were the outcomes
On average the outcome of shrinkflation for manufacturers is positive. The average shrinkflated SKU in this analysis (country = Netherlands) manages to sell:
- 15.7% more units.
- 4.8% more volume.
- 7.8% more value.
However, these results vary and are more positive when
(a) the original pack is relatively large (shrinking may be less noticeable)
(b) the SKU is a brand, not a PL (the latter may be chosen more for its volume vs price ratio)
(c) the brand has a large assortment (each individual SKU may experience less scrutiny)
(d) the category has experienced more shrinkflation (either consumers get used to the tactic or changes in certain categories are less likely to be noticed).
While these numbers seem to justify shrinkflation as a smart strategy to increase prices, be aware of the potential consumer backlash – or even retailers signaling such activities to consumers (see example by Carrefour below).
