Economic adjustments are prompting innovation from customers and small businesses alike. With rising raw materials and supply costs, small businesses must balance staying competitively priced and covering overhead costs. This new landscape calls for resource efficiency, creative sourcing or production alternatives, new market exploration, and diversified offerings. Technology is instrumental in streamlining operations, reducing costs, and providing innovative means to engage customers. Accordingly, this adaptation is crucial for survival and growth in a rapidly evolving business environment.
The term “shrinkflation” has grown in visibility recently, implying selling products of lesser quantity at the same price. A recent study revealed that 12% of small businesses already adopt this strategy, and 20% are considering it. Despite some critical views and potential negative impact on a brand’s reputation, businesses implementing shrinkflation should ensure their decisions are transparent to maintain trust and continue to deliver value to consumers.
Several factors contributed to small businesses‘ decision to turn to “shrinkflation” in 2024: enhancing profitability (64%), addressing production and supply chain costs (44%), refining business operations (32%), dealing with competitive pricing pressure (24%), and managing supply chain issues and limited resources (24%). Profit enhancement was the most significant factor provoking businesses to opt for “shrinkflation.”
Shrinkflation: Small businesses’ adaptation in a challenging economy
Shrinkflation can help businesses increase profit without significantly raising prices, by maintaining the same price per unit while reducing the production cost per unit. This tactic is especially prevalent in sectors where end-users, such as the food and beverage industry, are largely unaware of the product sizes. The strategy allows businesses to subtly expand their profit margins without alienating price-conscious consumers.
44% of businesses have also used shrinkflation to counteract production and supply chain costs. At times of staffing shortages and supply chain problems, shrinkflation provides an alternate means of maintaining profitability. While it can be controversial and misleading for consumers, it is becoming a go-to strategy during economically challenging periods.
Additionally, as a reaction to the challenges of competitive pricing, 24% of small businesses have adopted shrinkflation. Large corporations, too, have recognized its positive effects on customer retention and brand loyalty. Despite potential pitfalls, it’s a strategic pricing method that balances profitability and customer satisfaction.
Finally, 24% have turned to shrinkflation due to supply chain issues and scarce, costly materials and supplies. Despite uncertainties, these businesses continue to focus on maintaining quality and service levels, even if it means offering less to their customers amidst these global economic challenges.
