Understanding shrinkflation

Shrinkflation is the practice of reducing the size of a product while maintaining its sticker price. Raising the price per given amount is a strategy employed by companies, mainly in the food and beverage industries, to stealthily boost profit margins or maintain them in the face of rising input costs.

Shrinkflation is also referred to as package downsizing in business and academic research. A less common usage of this term may refer to a macroeconomic situation where the economy is contracting while also experiencing a rising price level.

Shrinkflation is a term made up of two separate words: shrink and inflation. The "shrink" in shrinkflation relates to the change in product size, while the "-flation" part refers to inflation—the rise in the price level.

Shrinkflation is basically a form of hidden inflation. Companies are aware that customers will likely spot product price increases and so opt to reduce the size of them instead, mindful that minimal shrinkage will probably go unnoticed. More money is squeezed out not by lifting prices but by charging the same amount for a package containing a little bit less. Academic research has shown that consumers are more sensitive to explicit price increases than to package downsizing, but that this practice can result in negative consumer brand perceptions and intentions to repurchase the product, and to static or declining unit sales volume over time. The effectiveness of shrinkflation as a pricing strategy appears to vary across different types of goods and markets.

From a company perspective, shrinkflation is a useful way to boost or maintain profit margins without drawing too much attention. This tactic is most commonly executed in the situations below. Retailers often engage in shrinkflation to combat higher production costs. When key inputs, such as raw materials or labor, shoot up in valuation, the cost to manufacture final goods rises. This subsequently weighs on profit margins; the percentage of revenue remaining after all costs.

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