Price Realization Through Creative Packaging

Take a look at the picture below. Can you tell which container is 2 quarters and which is not? Or are they both same?

These are indeed two two different sized containers. One is 2 quarts and the other is 1.8 quarts. The taller one is the 1.8 quart container. What is happening here is price realization through creative packaging. Customers are trained on the price they pay – more often they buy a product at a price the more they become tuned to any price changes. The price they remember becomes their reference price – any increases over reference price will be seen negatively. So brands use the only other lever available to them for better price realization : reduce their marginal cost by 10-20%.

For the same price or even a little lower price, customers will get smaller package than they usually get, effectively paying higher price. But it cannot be done without regard to customer perception of size. While customers are more tuned to the price, they are also tuned to sudden size reductions.

The proven principle in creative packaging is, “Super-size in 1-D, down-size in 3-D”.

that changes in size appear smaller when products change in all three dimensions (height, width, and length) than when they change in only one dimension

In this case Tropicana seem to have refined the earlier findings – “Downsize by reducing the cross-sectional dimensions while increasing the linear dimension“.  As you can see, the width reductions are hardly recognizable but the height increase is very obvious.

Is this wrong? Ben and Jerry’s thought so. We have seen this in the battle between Ben and Jerry’s and Haagen Dazs. Ben & Jerry did a “A pint is a pint” campaign which they later discontinued. But I do not see anything wrong with this approach as long as the real volume is printed clearly so we can make informed decision.

The trouble however is we are not Homo Economicus, we are susceptible to nudges and cognitive biases.

Where do you stand on creative packaging?

Lindt’s Bitter Profit Drop

Lindt reported almost 90% drop in its profit, while cost overruns was a contributor the main reason quoted by The Wall Street Journal is the failure to increase prices.

Swiss chocolate maker Chocoladefabriken Lindt & Spruengli AG has suffered from a failure to raise prices late last year to offset higher cocoa prices, underperforming rivals with an 88% drop in first-half net profit and lower overall sales.

The lead line from the WSJ article does not tell the full story. Lindt’s profit dropped from 22.9 million Swiss francs to 2.7 million Swiss francs.  There was a a one time charge 22.2 million Swiss francs in that expenses. Their operating profit, excluding these charges and taxes, is a better measure but still it includes factors unrelated to marginal costs, like currency fluctuations and depreciation.  So let us look at their gross margin numbers and compare the number for this six months against the same period last year (note we cannot simply use the previous six month period because of seasonality variations).

Compared to previous year same six months  their gross margin was 64% from sales of 1.03 billion Swiss francs  and this six months gross margin is  62% from sales of 0.985 billion Swiss francs. Their cost of revenue is almost identical to YoY numbers while their sales  fell 4.3% from its year over year numbers. This does support the theory that failure to pass on cost increases to customers as price increases resulted in loss.

To retain the same gross margin as YoY number, Lindt should have raised its prices by 8%, assuming its sales will not fall any farther than the 4.3% drop. They were concerned whether the sales would have dropped steeply if they had increased prices, a valid concern that can only be answered by looking at their market data on customer preference and price elasticity of demand at different price points. Their sales had to drop additional 7% (email me for the math) to make the price increase unattractive.

While costs are irrelevant to pricing (especially at 64% margin and for the premium product) the commodity price increase of last year should have been used as a pretext to increase prices. Customers are more willing to accept price increases when there is a reason (however trivial or irrelevant) than unexplained increases.  There are also other methods that would have increased margin without a direct price increase, one of which is using creative packaging that reduces amount sold for the same price saving marginal cost. Cadbury explicitly stated this in their annual report, and Nestle’s size reduction of Haagen Dazs was popularized by none other than Ben and Jerry’s (Unilever).

The net is, Lindt should have taken steps for better price realization (price increase , reduction in promotions and creative packaging) using the commodity price increase as a pretext.

Price Realization Through Creative Package Sizes

[tweetmeme source=”pricingright”]The most common type of price realization method employed by CPG brands is using creative packaging to reduce the amount of product for the same price. We seen examples of this from Cadbury and Haagen Dazs. If you walked by ice cream aisle and looked at Haagen Dazs (14 oz)  and Ben and Jerrys (16 oz) you would not be able to tell the difference. What is the best possible way to  change package size so the customers won’t notice it? Chandon and Ordabayeva, researchers from INSEAD, did experiments on customer perceptions of package size   changes and conclude that, “Downsize in 3D, Supersize in 1D” (pdf). From the three experiments they conducted they found

that changes in size appear smaller when products change in all three dimensions (height, width, and length) than when they change in only one dimension

 

Wider base and Shorter height

 

There is another not so uncommon practice of creative packaging for price realization that seem to have taken the lesson from Chandon and Ordabayeva and applying it to extract more revenue per customers. I came across a frozen yogurt chain called Tutti Frutti  that in theory does unbundled pricing, selling yogurt and toppings per ounce. They charge a flat price of  35 cents per ounce. They give you a choice of containers and ask you to serve yourself any of the flavors and toppings available. The fun is in letting each customer serve themselves and in the container design (shown left).

Their intention, I surmise, is to maximize price paid by the customer every time they make a purchase. One way is to get a customer to purchase more than they intended which can be achieved with a container with wider  cross-sectional dimensions (radius) and shorter height.

Does this work? In a 2003 study,  professor Wansink of Cornell  did experiments “to determine whether people pour different amounts into short, wide glasses than into tall, slender ones.”  He found that “both students and bartenders poured more into short, wide glasses than into tall slender glasses”. So it does work. Professor Wansink is also the author of the book, Mindless Eating and  writes a blog on healthy heating habits.

Won’t consumers figure this out? Is this a viable way to increase customer revenue per visit? No, definitely not. Judging from the comments in Yelp on Tutti Frutti people figured this out. The first time a customer buys she is going to be shocked to see the bill, as one Yelp reviewer noted her surprise from a $8.5 charge for a container. But from next time on they are bound to be more careful in pouring yogurt into their cups.