Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Shrinkflation Masks Real Price Hikes
Transcript
- Lucas: Look at your pantry right now. Specifically, that bag of chips or that jar of pasta sauce you bought last month. If you compare it to the one you bought two years ago, I bet the price is roughly the same, but the thing feels lighter. Luna: It’s weirdly subtle. I only noticed it with our daily coffee pods because the box looks identical, but the count dropped by four units. It feels like a trick. Lucas: That is exactly the point. It is called shrinkflation, and it has become the primary tool for consumer goods companies trying to maintain margins without spooking shoppers with sticker shock. We are looking at a landscape where direct price increases are politically and psychologically dangerous, so companies are shrinking the product instead. Luna: So they are betting on our blindness? Because if I don't weigh my groceries every week, I never notice. Lucas: Precisely. They are betting on what economists call the 'attention gap.' When you see a price go up ten percent, your brain registers a loss immediately. But when a fifty-ounce bottle becomes a forty-eight-ounce bottle, the visual difference is negligible unless you are holding both side-by-side. It is a calculated gamble on human perception. Luna: But isn't there a risk? If people finally catch on, doesn't that destroy trust faster than a simple price hike would? Lucas: That is the tension we need to unpack today. Because while shrinkflation works in the short term, it creates a long-term liability. We are going to look at how major beverage and snack companies have used this tactic since twenty twenty-two, and whether the margin protection is actually worth the erosion of brand equity. And before we dive into the math, I want to mention something about how this show runs. Luna: Right, because we keep this independent and ad-free. Lucas: Exactly. We deliberately don't run ads on these. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: It helps us keep the research deep and the commentary honest, so thanks for considering it. Lucas: Back to the shrinkage. Let's talk about the mechanics. Why do companies prefer shrinking packages over raising prices? It comes down to inventory management and shelf space optimization. Luna: Doesn't shrinking the package just mean you sell fewer units per shipment? That seems like it complicates logistics. Lucas: Not necessarily. In many cases, the reduction is small enough that the total volume shipped remains stable, but the retail price stays constant. This allows them to pass raw material cost increases directly to the bottom line rather than absorbing them. For a company like PepsiCo or Unilever, protecting gross margin is often more critical than maintaining unit volume growth in the short quarter. Luna: So they are prioritizing profit per unit over market share velocity. That sounds like a defensive move. Lucas: It is defensive, but it is also aggressive in its own way. By keeping the nominal price low, they keep their products competitive against private-label generics. If a national brand raises its price by fifteen percent, a store-brand competitor might only raise theirs by five percent. Suddenly, the national brand loses its appeal. Shrinking avoids that head to head price war. Luna: I see. So it’s about staying under the radar of the consumer's comparison shopping instinct. Lucas: Spot on. Now, let's look at the numbers. Over the last four years, we have seen some major brands reduce package sizes by anywhere from five to fifteen percent. Take chocolate bars. A standard bar that was once ninety grams might now be eighty-five grams. The price tag remains the same. The cost to produce that bar has gone up due to cocoa prices, so the margin actually improves despite the smaller product. Luna: That is fascinating. It’s almost like they are extracting more value from less material. Does that work for all categories? Lucas: It works best in categories where the product is commoditized and switching costs are low, but brand habit is high. Think about laundry detergent. The bottles look similar. The cap looks similar. The liquid level looks similar. But the concentration might be slightly lower, or the total volume reduced. Consumers buy based on muscle memory, not measurement. Luna: Muscle memory is powerful. But what happens when the shrinkage gets too obvious? Like if a cereal box gets noticeably thinner? Lucas: That is the danger zone. Companies are very careful to keep the external dimensions of the packaging largely unchanged. They use internal void fillers, air, or just reconfigure the layout inside to hide the reduction. If the outer box shrinks, customers notice immediately. If the contents shift slightly, they often assume it’s just settling during shipping. Luna: So it’s a game of optical illusion. Packaging engineers are basically magicians. Lucas: Absolutely. There is a whole field of packaging psychology dedicated to this. They use larger fonts on the front, brighter colors, and strategic placement of imagery to draw the eye away from the net weight declaration, which is usually tucked away in small print on the side or bottom. Luna: It feels manipulative. Do you think consumers are getting smarter about this? Lucas: We are seeing a rise in 'unit price awareness.' Shoppers are increasingly looking at the price per ounce or price per item on shelf tags. This is forcing companies to be more creative. Some are now introducing new sub-brands with smaller pack sizes at higher price points, effectively creating a new tier of product that justifies the shrinkage through branding rather than hiding it. Luna: So instead of shrinking the existing product, they launch a new 'premium lite' version that is actually smaller but costs more? Lucas: Exactly. It reframes the conversation. You aren't paying more for less; you are paying for a specialized format. It’s a way to escape the stigma of shrinkflation by making it a feature rather than a bug. Luna: That is clever. But does it work long term? Or does it just fragment the brand portfolio? Lucas: Fragmentation is a real risk. When you dilute your core offering, you confuse the consumer. But right now, the financial pressure is immense. Input costs for plastics, sugar, and energy remain elevated compared to pre-pandemic levels. Companies need every basis point of margin they can get. Luna: So they are walking a tightrope between protecting profits and losing trust. Lucas: They are. And the interesting part is that this isn't just happening in food. We are seeing it in personal care products, pet food, and even software subscriptions where features are being stripped out of lower tiers to justify keeping the entry price flat. Luna: Software is different though. You can see the features missing. With physical goods, you have to weigh them. Lucas: True, but the principle is the same. It’s about managing the perception of value. In software, if you remove a key feature, users complain. In physical goods, if you remove ten percent of the content, most users just buy it again next time because the pain of switching brands is higher than the pain of getting slightly less. Luna: Switching costs are the real hero here. Loyalty is just inertia. Lucas: Inertia is a powerful force. But as we move through late twenty twenty-six, we might see a tipping point. If inflation persists, consumers may become hyper-vigilant. The 'attention gap' could close as people start comparing unit prices more rigorously. Luna: Do you think regulators will step in? This feels like it borders on deceptive trade practices. Lucas: Regulators are slow. Unless there is a clear violation of labeling laws, which there isn’t—the label accurately states the net weight—they tend to leave it to market forces. But markets can punish brands too. If a brand becomes known for shrinking, consumers may switch to competitors who maintain their sizes, even if those competitors raise prices. Luna: So the brand that raises prices honestly might actually win back trust in the long run. Lucas: There is evidence of that. Some companies have started using 'price-pack architecture' strategies where they introduce genuinely new sizes rather than stealthily shrinking old ones. It is more transparent. It respects the consumer’s intelligence. Luna: Transparency as a premium feature. That’s a bold move for a commodity business. Lucas: It is. And it suggests that the era of pure manipulation is ending. As consumers get better at tracking value, companies will have to compete on honesty as much as on price. Shrinkflation might have saved margins for a few quarters, but it risks costing them market share in the years ahead. Luna: It makes you wonder which brands will survive the trust deficit. Are you buying anything differently now? Lucas: I check the unit price on everything. It’s a small habit, but it reveals a lot about what is really happening in your cart. Next time you are at the store, grab two items, flip them over, and compare the price per ounce. You might be surprised by the math. Luna: I’ll try that tomorrow. It’s a good reminder that the sticker price is only half the story. Lucas: It is. And as we navigate this economic environment, understanding the hidden mechanics of pricing is just as important as understanding the prices themselves.