Incredible Shrinking Potato Chip Package

Incredible Shrinking Potato Chip Package

Topic: Cost vs. price vs. value issues

Introduction

Scenario

Due to a 25% increase in the raw potato price, Julie, a potato chip Brand Manager, might need to raise the potato chip prices about 15% so to maintain the slim 5% profit margins. For example, there will be a price hike of $.24 on the most popular 7.5 oz. size, raising from $1.59 to $1.83.

Julie is worried that raising the price to cover up the increased cost might scare off her loyal customers, who would perceive the price hike as unfair. However, Julie’s boss, Dave, the Marketing Director, pointed out that downsizing/package shorting is a very common practice in the packaged goods industries.

Dilemma

Despite it being unethical as viewed by many people, it is not illegal to downsize its products, and it is a common practice within the industry. Should Julie’s company take this downsize approach?

Decision criteria

Stakeholders

1. Julie
2. Dave
3. Customers of Julie’s company
4. Competitors of Julie’s company
5. Stockholders and staff in Julie’s company

Possible options

1. Raise the price

2. Downsize the product

3. Maintain the price

Question: If everyone in the industry is taking the same option, which one will be the best option?

1. If everyone raised their prices, competition would remain the same, but companies will lose their profit margins.
2. If everyone downsized their product, competition, profit margins, and revenues would remain the same. The consumer will only lose a portion of the product which is too small that can be hardly noticed.
3. If everyone decided not to change the price but to keep the current price, they would face the risk of losing money.

Considering the above, option 2 above is the best option because if everyone downsized the product, there would not be much change of competition among companies. So, even if other competitors did this to Julie’s company, that would not do any harm to Julie's company because the whole industry is doing it.

Further question: Is it unethical to downsize the products?

Julie’s company is encountering the rise in the raw potato price but is considering the common industry practice – downsizing/package shorting to keep everyone happy. However, she needs to consider the ethical issue as it is important to the company just like price and value. So, even though it is not illegal to downsize the products, is it unethical to downsize the products?

Downsizing the products seems not ethical because it is like deceiving the customer with the “just noticeable difference”. However, it creates the right balance to stakeholders by getting satisfaction from this downsizing approach, and it is the best option for Julie’s company. The downsizing option will allow Julie’s company to maintain the customer base, profit margins and keep her customers happy. But the other possible options will lead to losses in profits, customer base, and it might be harmful to the  relationships with the customers.

By downsizing the products, Julie’s company can remain competitive whereas the customers are losing only 1.1 ounces of a product which is hard to be noticed. If Julie’s company opts for other possible options i.e. raising or maintaining the current prices, her company will be at risk of losing a great amount of revenue and the customer base which are considered much more than the consumers losing only an unnoticeable amount of product by the downsizing approach. However, if Julie’s company opts for downsizing the products, her company can maintain the profits, customer base and the customers are losing only an unnoticeable amount of a product.

Evaluate options (which option can maximize the benefits and minimize the harm for all stakeholders)

Possible options

1. Raise the price

Julie’s company will be benefited because it will be able to keep their profit margin at 5%. However, they will likely lose the loyal customers because they will be unhappy and see the price increase as unfair. In the competitive perspective, if competitors decide to maintain their current price, Julie’s company will likely lose a large portion of the customer base to their competitors due to their price increase. There might be losses in the long run because the customers are turning to the competitors who are able to offer a lower price and might never come back again. From the marketing viewpoint, the costs of attracting new customers are much higher than the costs of retaining the existing customers. Therefore, this is not a wise option for Julie, and this might ultimately harm the interests of the stakeholders.

2. Downsize the product

Julie’s company will be benefited because it will be able to maintain their profit margins and keep consumer loyalty. Her company can remain competitive while the customers will lose only an unnoticeable amount of a product. By downsizing the products, Julie's company will have the least impact on financials due to the increase of raw potato price. She need not to worry about losing the profits and customer base, and that can save her much costs on attracting new customers or retaining the existing customers as mentioned in 1. above. Therefore, this seems to be the option with the right balance and least harmful in every aspect. 

3. Maintain the price

Julie’s company will experience a profit loss if they are to maintain their current price due to absorbing the increase of raw potato price. This can be detrimental to the financials of Julie's company, and it has a negative impact on the interests of all stakeholders.

Best options

In view thereof, option 2 above has the greatest benefit and least harm for all stakeholders.

Conclusion

To conclude, for the case of “Incredible Shrinking Potato Chip Package”, the practice of downsizing the products will allow Julie’s company to maintain profits and customer base while having an unnoticeable effect to her customers. It is the most balanced option as opposed to other options in which might affect the stakeholders' interests in a greater deal. With such a right balance as mentioned above, it can be argued that the downsizing option is ethical as the customers as well as other stakeholders can be happier and satisfied with this option.