In a cash-strapped economy, it isn’t only consumers who are struggling. Brands and businesses are also finding that their profit margins are being squeezed. During the latter part of 2022 Shoprite and Pick n Pay spent a combined total of R906 million on diesel for generators at stores just to combat load shedding. To make up for this, one of the retail strategies that is being employed is to push some of these costs on to consumers. Shrinkflation, premiumisation and drip pricing are the methods used. Shrinkflation refers to brands maintaining the prices but subtly making the item, or amount you get, smaller. When companies emphasise or develop new luxury versions of their products and sell them at elevated prices, this is known as premiumisation. Drip pricing is when the advertised price does not include all the taxes and various handling fees, which are added in later. By the time you finalise your airline booking for example, you discover that it is nowhere near the low advertised price that caught your eye in the first place.
Why is it important?
Consumers tend to be more sensitive to price increases than to package downsizing. For some companies, reducing the weight, volume or quantity of products represents the best way to maintain profitability. Premiumisation addresses increasingly sophisticated consumer tastes and potentially leads to increased customer satisfaction and brand loyalty. Advertising low prices initially enables companies to gain market share as many consumers find it easier to accept the inflated prices later. But there are drawbacks. These retail strategies run the risk of alienating customers and losing market share. For example, in 2016 when Toblerone changed the shape of their iconic bar, making the gaps between the triangles wider, there was outrage from the public. It continued until 2018 when the company capitulated and returned the bar to its original shape, but made it larger and raised the price. The British rock band, The Cure, forced Ticketmaster to refund fans a portion of unnecessarily high fees after outraged fans took to social media.
What can businesses do about it?
According to a survey, 80% of companies are passing on rising costs to consumers, as a way to cope with rising inflation. The cost increases need to be absorbed somewhere, and in the view of business leaders, some of this needs to be by consumers. But businesses need to be careful when employing the retail tactics described above. To the consumer, some of them appear deceitful and may incur pushback which could lead to reputational damage, as in the case of the Toblerone. It is advisable for companies to be transparent when raising prices. Consumers don’t want to feel hoodwinked.
By Faeeza Khan
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Image credit: Adam Nir