Shrinking Products, Increasing Prices

So does this mean that the original was of subpar quality? This phrase often unnerved me, rather than pleasing me as companies intend.

So does this mean that the original was of sub-par quality? This phrase often disturbs me, rather than making me excited as companies intended.

Companies are constantly trying to spice up their products in order to keep current customers interested, as well as to reach out to a broader consumer base. New flavorings and new packaging are two examples as to how expansionary marketing tactics are implemented. Recently, I noted that the size and portions of many items on the shelves have been shrinking. You should definitely take note of this trend because it will affect your spending habits. At first you might not notice the subtle difference, but over time you will be keenly aware of the fact that you are spending significantly more.

As you can see from the diagram, there are a few steps between production and actually reaching you, the consumer. The more steps, the more hikes in price.

As you can see from the diagram, there are a few steps between production and actually reaching you, the consumer. The more steps, the more price hikes.

Why is it that items are suddenly shrinking in size? Based on the cell phone market, one would think that companies are all thinking that bigger is better! When creating a product, there are various parts that go into production. Labor, equipment, and ingredients all cost money. When pricing a good, companies add up their expenses and then decide on a price that both covers their costs and leaves room for a profit. (Actually, a middleman gets involved between the manufacturer and the store. By the time the item reaches your shelf, the price has been marked up significantly.)  If the cost of any of these inputs goes up, the company transfers the burden on the customer. It makes sense: if the price of an input rises, then the value of the final good is greater than it was before; therefore, a new price is needed to reflect the appreciation in value. Businesses cannot continue to charge the same amount when it costs more to produce-otherwise they would soon go out of business. And since there is inflation, prices have continuously risen over time. However, because wages have gone up at the same rate, people normally do not feel such a pinch on their bank accounts.

Of course, this normally happens in a healthy economy. As I have mentioned in past blogs, the US economy is still very fragile. While it is indeed expanding, growth is very tepid. Businesses are afraid to do anything too drastic, lest they set off a negative response and cause sales to plummet. Knowing that increasing prices is not the appropriate tactic in this scenario, they chose a creative and discrete method in order to offset the rising cost of inputs.

A graph depicting the Law of demand. As the price (on the y axis) goes down, the quantity demanded (the x axis) increases.

A graph depicting the Law of demand. As the price (on the y axis) goes down, the quantity demanded (the x axis) increases.

         Their solution: shrink the size of their goods, but keep prices the same. That way, they would actually be charging customers more, but in such a subtle way that many would not notice. Psychologically, they reasoned, people are more likely to notice a price hike of $0.20 than to notice that an item is 0.5 ounces smaller. This way, they successfully circumvent a fundamental rule in economics, the Law of Demand, which dictates that demand decreases when price increases. Furthermore, by using a new shape, a company appears more modern and dynamic, thereby attracting more attention. Genius!

A conspicuous example of shameless shrinking is evident in the new Chobani yogurts. For a while, I was ecstatic with this Greek yogurt company. Its products are yummy, healthy, and cheap (using this coupon which often doubles). Did I mention that their key lime pie

It might not have as fancy a facade as the brand name, but it tastes just as good. Never judge a book by its cover-in the case of saving money and getting more, the generic brand is a win-win.

It might not have as fancy a facade as the brand name, but it tastes just as good. Never judge a book by its cover- by paying less overall and getting more for what you paid, the generic brand is a win-win.

flips are to die for? The American market shares similar positive sentiments about Chobani, as it has become the latest official craze. Unfortunately, what was originally sold at 6 ounces is now only 5.3 ounces. How did Chobani divert attention from the smaller size? It began labeling the new containers as being “under 100 calories” because it knew that its health conscious audience would respond well to the lower calorie content. Though I eat healthy for the most part, I did not view this positively. As someone who is capable of eating A Lot, I realized immediately that fewer calories mean less volume. (I figured this out with my brain, though, not my stomach.) Unfortunately, many people are not so acutely sensitive to being ripped off; many people I asked did not realize that the Chobani yogurts were smaller. Looking at the shelves in Shoprite, I noticed that the generic Greek yogurts were still the original 6-ounce sizes. Thus, they are not only cheaper than the brand name at face value, but also proportionally, as they cost substantially less per ounce.

The original shape and size of Chobani yogurts. This is 6 ounces.

This is the original size and shape of Chobani yogurt. It is 6 ounces.

This is the new shape you might have begun to see on shelves. New features include a more defined rim, a claim of being 100 calories, and 5.3 ounces label.

This is the new shape you might have begun to see on shelves. New features include a more defined rim, a claim of being 100 calories, and 5.3 ounces label (bottom left).

 

 

 

 

 

 

 

 

 

 

 

Not all foods are shrinking, though. Since the 1970’s, fast food portions swelled in size.  A sad reality in a world struggling with

And we wonder why people are struggling to maintain their weight in today's society...

And we wonder why people are struggling to maintain their weight in today’s society…

an obesity problem, and probably an important contributing factor, value sizing is a way to make consumers feel like they are getting the biggest bang for their buck. The food is already dirt cheap, so companies can afford to increase the portions.

Why is it that some companies are decreasing portions while others are increasing them? I have two possible answers that are based on two different economic concepts.

Firstly, everyone tries to maximize his or her own utility, or happiness. For people who eat healthily, their utility will not be greatly impacted if there is less Chobani. They are trying to maintain their weight and realize that eating this Greek yogurt, no matter how much, is still good for them. People going out for fast food, on the other hand, are concerned with buying food at a low price. The more they get, the greater their utility. Imagine if, at a drive-thru, you get an order of fries that is half the size it used to be. You would not be happy.  Companies realize this discrepancy and act accordingly. Not only does the utility of fast food eaters go up more if the size increases, but also the cost of doing so is significantly cheaper.

blog 5.8 hipster healthy

Hipsters, notorious for being a part of a wealthier demographic, are willing to spend more to eat healthily.

Cost affects consumer behavior as it does business behavior. Elasticity is the degree to which supply or demand is sensitive to changes in price. In the case of changing portion size, elasticity clearly manifests itself. When Chobani changes the size of its product, thereby making it more expensive, demand is highly inelastic- people will continue to buy it despite it costing more.

Ever seen this at a local Drive-thru? Probably not, because people buying there are most likely on a strict budget.

Ever seen this at a local Drive-thru? Probably not, because people buying there are most likely on a strict budget.

To eat healthily, they are willing to pay more. However, when it comes to unhealthy food, demand is extremely elastic. Increase the price by even a small amount, and a large number of people will stop buying. The appeal in this type of food is, after all, in its cheapness; it certainly is not heart healthy. The only way to appeal to more consumers in this case is either by decreasing the price or by increasing portion sizes. Since we live in a time of rising prices, the latter is the more plausible method.

Because of external influences such as store promotions, sales, and tax hikes, prices are always in a state of flux. Since the subtitle of this blog is “financial advice from yours truly”, I feel that it is my responsibility to enable you to legally acquire things for the cheapest price. The first way to do this is by being on the lookout for business tactics that trick consumers into paying more than they need to. Be conscious of prices, but more importantly in this case, beware of the shrinking sizes!

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Published in: on February 23, 2014 at 6:28 am Comments (1)


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  1. on May 30, 2014 at 5:04 am www.youtube.com Said:

    You will sure save yourself a couple of bucks on office rent, which can be a
    real pain in the neck with brick and mortar stores.
    Also, find out if they’re able to provide top quality
    articles for the web. Accurate financial records are key to business success.

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