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Posted: April 25, 2014
Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 


 
 

I Scream, You Scream (But Only When the Price Goes Up)

Bottom Line: In a study comparing consumers’ reactions to price hikes and package sizes, shoppers responded far more negatively to paying more than to getting a little less—providing firms with a mechanism to dilute their rising costs without passing all the charges on to their customers.

Package downsizing—subtly shrinking a product’s volume per container—has become prevalent in many consumer products in the United States. Companies argue that the practice makes sense, given consumers’ concerns about the environmental impact of large packaging, their desire to reduce their calorie intake, and their demand for smaller quantities and lower prices. In addition, the financial downturn led to an increase in the prices manufacturers pay for raw materials.

As a result, many prominent culinary brands have downsized their container sizes while keeping prices roughly the same. For example, Breyers reduced its “half-gallon” ice cream cartons from the “true” volume of 64 ounces to 56 ounces in 2000, and then to 48 in 2007. Dannon yogurt cups also shrank from 8 to 6 ounces in 2003, and Hellman’s mayonnaise jars dropped from 32 to 30 ounces in 2006. Examples also abound in household goods, such as soap and paper towels.

The trend has attracted widespread criticism from consumers, who accuse firms of quietly charging the same amount for less. However, a new study of sales data from the Chicago ice cream market over a recent 10-year span finds that consumers react far more negatively to price hikes than to package shrinkage. In fact, when deciding on their purchases in the grocery aisles, consumers proved to be about four times as sensitive to a higher price as to a smaller container.

The clear implication, the authors write, is that “marketing managers can use downsizing as a hidden price increase in order to pass through increases in production costs…and [meanwhile] maintain, or increase, their profits.”

The authors focused on the half-gallon ice cream market because of its pervasive appeal and the highly competitive nature of the sector. The frozen food section has limited space, after all, and the relatively few national or store brands that produce ice cream closely monitor one another’s pricing and packaging strategies.

The study centered on the four leading ice cream brands sold in Chicago grocery stores—three national brands and one store-produced—which accounted for more than 70 percent of the total sales of half-gallon cartons (the highest-selling container, and the one downsized the most regularly, during the period studied). The authors analyzed Nielsen Homescan data, tracking the ice cream purchases of more than 600 Chicago households between 1998 and 2007.

On average, the authors found, the unit price of half-gallon ice cream has gone up at a proportionately higher rate than the package price—in other words, consumers have to spend more per ounce, if not necessarily per package, when they purchase a smaller carton. “The data suggest that marketing managers may use downsizing in order to implicitly raise prices,” the authors note, by keeping the package price steady but slightly shrinking the contents.

But that elicits a further question: Is package downsizing more profitable than merely raising prices? To compare consumer reactions to each strategy, the authors analyzed fluctuations in demand in the Chicago ice cream market in the wake of other changes.

On average, a brand’s price hike decreased the likelihood of consumers’ purchases, the authors found. On the other hand, a slight uptick in package size or advertising efforts made it more likely that the brand’s ice cream would wind up in shoppers’ carts.

They also found that consumers were about four times as sensitive to price increases as they were to reductions in package size, providing compelling evidence that marketers should consider downsizing a shrewd way to boost price–cost margins without appearing to charge consumers more. In many competitive environments, the authors note, managers have a very narrow range in which they can raise prices without damaging sales and driving consumers to their rivals. Slimming down the package size seems to be a viable alternative to inflating the price tag.

Managers have a very narrow range in which they can raise prices without damaging sales.

But managers should also take into account the various demographics of the market. Both households with higher levels of employment and higher levels of income proved less sensitive to downsizing; but larger families reacted far more negatively to smaller cartons. So marketers could downsize convenience and luxury items in areas populated mostly by smaller families with more income or employment, while avoiding downsizing in areas populated by larger families.

Why do consumers seem so much more sensitive to price hikes than package sizes? Quite simply, most consumers never get past the cost of an item, the authors posit, and tend to trust their eyeballing of packages when estimating their size rather than seeking out the small print. It takes less mental effort to scan the price tag than to break down subtle modifications to the unit price or package shape.

Considering that so many firms are facing higher production costs (for example, rising fuel and food prices), downsizing could potentially bolster profit-maximizing efforts. By shifting expenses further down the supply chain, away from the manufacturing end and toward the marketing sphere, firms could cut costs without seeming to raise prices for their customers.

Source: Consumer Response to Package Downsizing: Evidence from the Chicago Ice Cream Market, by Metin Çakir (University of Saskatchewan) and Joseph V. Balagtas (Purdue University), Journal of Retailing, Mar. 2014, vol. 90, no. 1

 
 
 
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