Value Deflation

Value deflation, also known as ‘shrinkflation’, happens when manufacturers and service providers decrease their prices and sell fewer packages, deliver smaller items, or simply produce less for the same price in order to retain the same sticker price. The business reduces its operational costs by selling smaller portions of a product for the identical price as the simplest way of stealthily increasing profit margins in an exceedingly market where consumers are price-conscious. Deflation of the economy-wide value is in fact a form of price inflation, to the degree that it results in lower real demand at the same price level.

Value deflation will lead to an understatement of the inflation rate and the cost of living unless it is accounted for in price index measurement. When operating costs are on the rise, most companies indulge in value deflation, but the business does not want to pass on increased costs to customers in the form of price increases. Therefore, businesses provide less for the identical price as the way of maintaining the worth level. It can contribute to inflation and particularly to inflation that goes unaccounted for by statistical agencies. In the food and beverage industry, this practice is popular, where corporations reduce the quantity of goods without raising commodity prices as a way to stealthily raise profit margins while maintaining their market share.

Value Deflation

Value deflation can also involve reducing the number of raw materials utilized in the manufacturing of a product or replacing the active ingredient with a lower quality ingredient. It is a means of raising costs, because the consumer is less likely to care, and it can take the form of increases in the amount of food in a standard box, decreased portion sizes at restaurants, longer waiting times, and decreased customer service and support, or switching to lower-cost ingredients or materials. The deflation of value is an alternative to the rising costs of goods and services. It may take the kinds of reductions within the amount of content during a package, reduced portions per plate, reduction in customer support, or using low-cost ingredients.

Since many shoppers are more susceptible to a price shift than to a quality change, it can be a good tactic. From a marketing point of view, in order to retain a stable price point, shrinking packages is safer than raising costs. A slight reduction in quantity will sometimes go unnoticed by buyers, as long as the price sticker does not change. If there’s a change within the pricing of a product, consumers will find cheaper substitutes for the merchandise, and it’ll lead to lower sales. Inflation indexes such as the consumer price index or the retail price index may not indicate the deflation of the value.

Increased production costs in the manufacturing of a commodity are one of the major causes of value deflation. Raw materials, labor costs, and energy costs are some of the components of manufacturing costs that may raise commodity prices. Many economic statistics agencies use quality adjustment processes to separate price movements from shifts in the weight or quality of the commodity, so the price increase in official inflation statistics could still appear in them. An increase within the price of one or more of the components directly impacts the profit margins of the corporate. Instead of increasing the value of the merchandise, a manufacturer may arrange to switch to lower-cost input costs to scale back the value of production.

Many of the value deflation strategies can, however, be difficult to calculate by design. Without drastically modifying the product, manufacturers may turn to lower-cost inputs. In the retail sector, there is heavy competition and retailers also have to work hard to hold their prices down. Any changes within the prices of products and services can easily affect consumer behavior, who could also be inclined to search out substitutes that are favorably priced. In particular, it can be difficult or impossible for customers and statisticians to prepare for and adjust for decreases in services or decreases in the quality of products and materials.

Value deflation works against inflation because when calculating inflation, the output size is not considered. The estimated inflation is skewed since the price sticker remains constant. Consumers around the world should be on the lookout for these packaging tricks whether value deflation amounts to the “perfect business crime”, or not. From a health perspective, reducing the dimensions of select products or a number of their ingredients may have a positive impact on consumers. Reducing sugar as an ingredient in pastry items such as cookies, cakes, candy, and chocolates will help to reduce obesity and other health problems associated with excess sugar, for instance.

 

Information Sources:

  1. corporatefinanceinstitute.com
  2. investopedia.com