Stealthy Pricing (2008 Jul)

by Barry A. Liebling

Suppose you are in the business of selling packaged goods. Your product might be any consumable such as cereal, candy, ice cream, soap, or paper towels. You decide to raise the unit price of your product.

How should you proceed? The most straightforward approach is simply to charge more for whatever you are selling. For example, if your cereal has a price tag of $3.99 you can change it to $4.29. Do this and your customers will decide whether to buy your cereal as often as before, to purchase it less frequently, or to buy something else instead. While customers may not be happy with the escalating price, they will know exactly what you are doing and cannot accuse you of being sneaky.

You might think that raising the price directly is not a good business move. Perhaps customer price sensitivity will make it difficult for you to realize a profit. How else can you adjust your offering that will be more acceptable to consumers?

According to a recent article in USA Today (Consumer Products Shrink, Prices Don’t. by Bruce Horovitz. many companies are increasing unit prices in a round-about way. They reduce the amount of product while selling the package for the same money. Some examples are a 12 ounce bag of chips shrinks to 10 ounces, 1.75 quarts of ice cream is replaced by 1.5 quarts, a 4.5 ounce bar of soap is phased out for a 4 ounce bar.

As expected, a lot of consumers and industry critics are not pleased with the product downsizing, and are angry at the manufacturers. What are manufacturers saying in their own defense, and how reasonable are their explanations? There are three arguments companies commonly use to justify stealthy pricing.

The first approach is a recitation of how much manufacturing costs have ballooned. Company representatives are quick to point out that they are spending more for raw materials than anytime in recent history. Thus, they have to raise their prices to remain profitable. And they prefer to elevate their unit price by reducing the amount the consumer gets.

This approach is an attempt to divert the critic’s attention to a side issue. There is no question that manufacturing costs can get out of hand making it necessary for a company to adjust prices. And a company has the right to move prices up or down at will – even as consumers may accept or reject the company’s offering. The crucial point is not about raising prices but about concealing that the prices are being raised. A company that makes it difficult for consumers to discover a price increase is not being forthright – and that is the problem.

The second explanation manufacturers often use addresses the issue of concealment. Company representatives will say that they have no intention of misleading consumers. They explain that the exact amount of product is clearly marked on the package. Any interested consumer can easily see how much she is getting for her dollar.

Again, the company representative is missing the mark. Unless there is fraud, there will always be accurate information about how much product the consumer is buying. But a buyer has to be prompted by something to check the label. If the manufacturer strives to make the new small package closely resemble the older large package many consumers will fail to notice the difference. Cynical company executives might be fastidious about having accurate labels and staying on the right side of the law, while hoping that consumers will fail to detect the price increase. Here the company policy may be legal, but the intention is to hide something important in plain sight.

The third approach used by manufacturers relates to consumer preferences. There have been a number of empirical studies showing that some consumers would rather pay the same money and get less product than pay more for the same product. Company executives sometimes argue that by reducing package size they are striving to please a large segment of their customers.

But the consumer preference argument does not stand up to scrutiny. If company executives were sincere they would not try to mask the change. Product packages could proclaim, “Same great price, now there’s less.” Note that manufactures are not shy about printing, “Get more for the same price” on their packages when they are having a promotion.

So what is the right way to increase your prices when you want an alternative to the direct approach? The key is that you should clearly inform the consumer exactly what you are doing. If you employ a stealthy approach alert consumers will learn that – within legal limits – you will attempt to fool them, and they should deal with you cautiously. Consumers will conclude that you are not to be trusted, and they will be right.

*** See other entries at in “Monthly Columns.” ***

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