Price increases: Should retail prices be raised or package sizes be reduced?

Have you ever found that the real price of a product you buy increased ever so slightly, either by a shrinking of the product’s content or by the addition of a few cents to the product’s retail price? If you’ve noticed such changes at your local retailer, you’re not alone. These subtle tactics became pervasive during a time when consumers were less educated and connected; the tactics were not likely to be noticed and, even if they were, word of the change would not spread far. Today’s market-wise consumers, however, are quick to notice such changes and to spread the word to wide audiences via social and other media.

For example, the Consumers’ Union blog The Consumerist has dubbed the practice of reducing content “The Grocery Shrink Ray,” and its readers regularly submit photographic evidence of it from their local retail shelves. So how do consumers react when they notice these changes?

A study of U.S. consumers by our Project Coordinator, Luke Kachersky, to be published in the Journal of Retailing, revealed that the answer depends on the type of consumer. Consumers that are less knowledgeable about marketplace pricing tactics tend to be more focused on affordability, and react more negatively when the retail price is increased versus when a package’s contents are reduced, and this negative reaction is aimed at retailers. By contrast, consumers that are more knowledgeable about marketplace pricing tactics tend to be more focused on transparency, and react more negatively when a package’s contents are reduced (arguably a more subversive tactic) than when the retail price is increased, and this negative reaction is aimed at the product brand. Further, when a package’s contents are reduced this segment of consumers tends to think that the change was made in order to boost profit margins and not for other reasons such as an increase in companies’ costs of production or distribution.

It’s rare that consumers enjoy price increases, but nevertheless prices must sometimes be raised. The findings from this study highlight the need for product brands and retailers to work together in doing so. In particular, they must understand their markets first, and then choose the price increase tactic consumers find least offensive.

Finally, did you know that in the 1970’s many U.S. states mandated the display of unit price information (e.g., price-per-ounce)? Subsequent research in the 80’s and 90’s found that many consumers ignored the information. The results of this research, though, highlight just one small way in which the world has changed – now more intelligent and connected – redeeming the virtue of a decades-old policy.

SOURCE: Kachersky, Luke (forthcoming). “Reduce content or raise price: The impact of persuasion knowledge and unit price increase tactics on retailer and product brand attitudes.” Journal of Retailing.

FURTHER READING:

Consumer Reports (2011, Feb.). "Downsized: More and more products lose weight."

Clifford, S. and C. Rampell (2011, Mar. 29). "Food inflation kept hidden in tinier bags." New York Times.