Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Retailers Hide Price Hikes In Plain Sight
Transcript
- Lucas: If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo. It’s not about the money for us, it’s about keeping the signal clean and ad-free so we can actually dig into the stuff that matters. Luna: Right, and it lets us keep the depth high without the noise. Thanks for making that possible. Lucas: Let’s dive in. We’re talking about the art of the silent price hike. Specifically, shrinkflation and product reformulation. The big shift we’re seeing in September of twenty twenty-six isn’t just about raising the sticker price. It’s about changing the physical product so the price stays the same, but the unit cost drops. Luna: So the consumer pays the same amount but gets less product or a different formulation? That feels like a really aggressive margin play. Lucas: Exactly. And it’s driven by a simple math problem. When input costs rise due to supply chain pressures or raw material inflation, raising the retail price triggers immediate consumer scrutiny. People notice a five-dollar item becoming six dollars instantly. But if you reduce the net weight from ten ounces to nine ounces while keeping it at five dollars, the price per ounce increase is hidden in the fine print. Luna: It’s a friction point only when you actually measure it out. Most people just grab the bag again. Lucas: Precisely. And this is where the data gets interesting. Look at the snack industry. Major players have been quietly reducing bag sizes by anywhere from five to fifteen percent over the last eighteen months. They aren’t calling it shrinkflation because that’s a pejorative term with negative PR baggage. Internally, they call it 'right-sizing' or 'value optimization.' But the effect is identical. Luna: I noticed this with my household cleaning products. The bottles look the same on the shelf, but they feel lighter. Did you see those reports on detergent density? Lucas: Yes, and that leads us to the second tactic: reformulation. This is trickier than shrinking packaging because it involves chemistry. Companies swap expensive ingredients for cheaper alternatives that perform similarly but cost significantly less. Think about personal care brands shifting from natural botanicals to synthetic analogs, or food manufacturers adjusting sugar and fat ratios to maintain taste profiles while lowering commodity exposure. Luna: That sounds risky though. If the quality drops even slightly, don’t you lose trust faster than if you just raised prices? Lucas: It is a massive risk. The key is invisibility. If the reformulation is undetectable to the average consumer, you win. You protect your margin without triggering the 'why did this get worse?' backlash. But if it’s noticeable, you’ve created a permanent fracture in brand loyalty. We’re seeing some mid-tier brands slip up here. They cut corners too visibly, and suddenly their customers migrate to premium competitors who maintained quality. Luna: So it’s a tightrope walk between protecting the bottom line and preserving the relationship with the buyer. Lucas: Spot on. And let’s look at the economic context right now. In Q three of twenty twenty-six, we’re still dealing with sticky core inflation. The Federal Reserve has held rates steady, but wholesale prices haven’t collapsed. This means businesses are locked into higher input costs. They can’t pass everything through via direct price hikes because demand elasticity is high. Consumers are trading down or cutting back. So shrinkflation becomes the default hedge. Luna: It’s basically forcing the consumer to absorb the inflation in smaller, less obvious increments. Lucas: Exactly. And there’s a psychological component to this. Behavioral economics tells us that consumers are more sensitive to absolute price changes than to unit price changes. A jump from five dollars to five fifty feels painful. A drop in volume from one hundred grams to ninety-five grams feels negligible unless you’re actively comparing labels. Brands are betting on our inattention. Luna: Which makes sense given how fast we shop now. We’re not reading every label anymore. Lucas: Right. And this trend is expanding beyond snacks. We’re seeing it in pet food, where owners are emotionally committed but financially stretched. Pet food manufacturers have reduced kibble counts in bags by significant margins. The dog doesn’t care if the bag is heavier or lighter, but the owner eventually notices the bag empties faster. That’s a retention risk waiting to happen. Luna: I’ve definitely bought the same brand of dog food and felt like it ran out quicker. I just assumed it was because my dog was eating more. Lucas: You probably were, but the shrink was real. And here’s the twist: some companies are doing the opposite. They’re increasing package size while raising prices slower than inflation. These are the brands trying to steal market share from the shrunken giants. They’re using 'value packs' as a wedge to pull price-sensitive shoppers away from the incumbents who are relying on shrinkflation. Luna: So it creates a bifurcation in the market. One side hides the price hike, the other leans into transparency. Lucas: Exactly. And the transparent ones often capture the loyalty of the educated consumer. But the shrunken brands often dominate the mass market because they avoid the sticker shock. It’s a battle between short-term margin preservation and long-term brand equity. Most C-suite executives are incentivized by quarterly results, so they lean toward shrinkflation. Luna: Short-termism wins again. Unless the backlash gets too loud. Lucas: Unless. And we are starting to see regulatory attention. Several states are looking at legislation requiring clearer labeling of net weight changes. If the government forces disclosure, the game changes. Then the consumer sees the nine-ounce bag next to the ten-ounce bag and realizes they’re paying the same. That’s when the tactic stops working. Luna: That would force them back to raising prices openly. Which might actually be healthier for the market. Lucas: Probably. Transparency forces competition on value rather than deception. But until then, the strategy persists. Let’s talk about B2B. Does this happen outside of consumer goods? Luna: Absolutely. Software companies do it all the time with feature gating. You pay the same subscription, but they remove access to a tool you used to have. Lucas: That’s digital shrinkflation. And it’s even harder to detect because there’s no physical package. A company might reduce the number of API calls allowed per month, or limit cloud storage quotas. The invoice says the same amount. The service feels slightly more constrained. It’s a slow bleed of value that keeps churn low because switching costs are high. Luna: Switching costs are the ultimate moat there. Once you’re locked in, you just absorb the degradation. Lucas: Until you hit a breaking point. And that’s when the negotiation happens. Procurement teams start demanding concessions. But for the average user, it’s invisible. Back to retail, what about private label brands? Are they joining the shrinkflation party? Luna: They have to be. Their whole value proposition is being cheaper. If they don’t shrink, they can’t match the branded price points while maintaining margins. Lucas: Correct. Private label is under immense pressure to keep prices below national brands. So they shrink their packages too. We’re seeing grocery store brands reducing pasta bag weights by ten percent to keep the shelf price stable against inflation. It’s a race to the bottom on quantity, not quality. Everyone is trying to be the cheapest option without appearing expensive. Luna: It’s a weird equilibrium. Nobody wants to be the first to raise prices, so everyone shrinks instead. Lucas: Until someone blinks. And usually, it’s a crisis that forces the hand. When raw material costs spike unexpectedly, companies can’t shrink enough to cover the gap. Then they have to raise prices. But in normal times, shrinkflation is the path of least resistance. Luna: So for consumers, the best defense is just to compare unit prices. Check the cost per ounce. Lucas: Always. And check the ingredients list for reforms. If a favorite product tastes different, assume something changed. It’s rarely for the better. This strategy works as long as we stay distracted. But as awareness grows, the margins will compress. Because once you know you’re being played, you stop buying. Luna: It’s a trust game. And trust is the most expensive thing to rebuild. Lucas: Exactly. So watch the bags, watch the bottles, and watch the invoices. The price might look the same, but the value is moving.