5 Dec 2022
No one likes price increases but given the rising costs of raw materials and energy, they are unavoidable. In 2022, bakery owners have been saying that nearly all their ingredients had gone up in price. According to a British baker speaking to the BBC, flour was up 24%, butter 20%, and walnuts as much as 80%. The fueldiesel for his delivery vans had increased 35% and his rent 10%, forcing him to raise prices.
But what’s the best way to tackle such a price increase? Harmen Oppewal, Professor of Marketing at Monash University in Melbourne Australia, has studied this. This expert in consumer choice behavior focused his research on buying decisions and studied different ways of implementing unavoidable price increases. His research team’s most important finding was that consumers respond more favorably to getting less product through ‘shrinkflation’ than they do to paying more. The best solution is a combination of reducing the package size while also lowering the final sales price.
What exactly is shrinkflation?
Oppewal: “Shrinkflation, also known as the shrinking effect, is when manufacturers maintain their product prices while reducing the volume of their products. For example, a loaf of bread is made 5 to 10% smaller or fewer biscuits are put in a packet, so that consumers don’t notice immediately that they’re in fact getting less product for the same money.
A lot of previous research has shown that consumers are averse to shrinkflation. At the same time, we know that consumers don’t like price increases either. Moreover, they don’t always notice reductions in package size, so they’re less sensitive to them as a result. On the other hand, the following holds true: when consumers realize that package sizes have been reduced, they feel cheated, which is bad for a business’s reputation. Therefore, neither strategy is perfectentirely effective. Each has its pros and cons.”
You researched the best tactics for implementing price increases. What did you find to be the best method for increasing prices?
“When manufacturers need to raise net unit prices, they can communicate and package this in various ways. You can reduce the quantity per package so that you receive a higher net price. Or you can simply raise the price, which is simpler and more transparent for consumers.
We thought, you can also combine both price increase strategies. To increase the unit price, you can say that you’re going to increase the unit price a little more than you’re going to increase the package size, and you’ll still get a net increase. But you can also create a situation where you reduce the package size and lower the sales price. You then reduce your package size to such an extent that you can also lower the final sales price, while making the unit price higher.
This may seem a bit strange, but this is how it works: you shrink a one-liter package for 1 dollar to 800 ml while lowering the price to 90 cents. This way you reduce the volume by 20% and the price by 10%. Thus, the net price of the product goes up.
Our hypothesis was that people would react more positively to a combination of reduced package size and reduced sales price than they would to other price increase strategies, such as reducing volume or raising prices.”
And did this prove to be so?
“In our study, we implemented the exact same price increases in different ways, but we observed a significant difference in people’s reactions. The sales figures always increased when prices were lowered, even in cases of shrinkflation. Therefore, lowering prices is very effective, even when the consumer is a net loser. The most successful pricing strategies combined a price decrease with a reduction in volume and an increase in size with an increase in price.”
How do you explain the consumers' attitude towards shrinkflation?
“In a supermarket, people need to make a lot of decisions in a short space of time as they fill their shopping baskets. They cannot assess all the information for every item carefully; therefore, they respond to simple cues. What’s more, price reductions look good and have positive associations. Additionally, this information is faster and simpler to process than a decrease in volume.
Furthermore, there’s a ‘silver lining effect’, where a small gain (a lower price) coupled with a larger loss (an even smaller package) is preferable to only a small loss in the form of a price increase or reduction in volume. This is caused by ‘loss-aversion theory’: people experience the pain of loss more strongly than the pleasure of gain.”
What was the design of your study?
“We carried out our research in a real Brisbane supermarket. For a short period, we changed the signage on the supermarket shelves, to address all different possible price changes. We didn’t change the products themselves or the sales prices, but we used shelf signage to show the supposed price changes. The price information could only be seen by consumers who shopped at the supermarket in person.
We researched different product groups: coconut rolls, soy milk, confectionary, biscuits, and coconut water. We altered the signage so that it appeared as if one of the following four price increase tactics had been applied:
price increase only
price maintained and package size decreased (shrinkflation)
package size increased and sales prices increased even more
price reduced and package size decreased (shrinkflation variation)”
Taste Tomorrow
Taste Tomorrow is the world’s largest ecosystem for consumer understanding in bakery, patisserie and chocolate. By tracking local and global consumer behaviors, attitudes and choices it provides us with valuable, in-depth insights. We are able to use these insights to track the evolution of trends and reveal new ones, helping your business to stay connected to your customers and discover new opportunities.
