A few years ago, a yogurt brand increased its margin by putting less yogurt in every container while keeping the same retail price. So that the products wouldn’t look smaller, they kept the same packaging, which meant that every container suddenly had several inches of air at the top of the yogurt. To justify this obvious drop in value, they added a package burst that said, “Now Room For Your Favorite Mix-ins!” They tried (unsuccessfully) to make the fact that they were short-selling product into a consumer benefit.
There is constant pressure in business to improve margins through cost-cutting. This is particularly true in 2013, when consumer confidence is shaky and many community costs (particularly in food) are on the rise.
Cost-cutting can be the mother of invention, inspiring creative problem-solving and efficiency. But it can also tax product quality over time. Consumers may not notice the change in any one cost-cutting round, but the cumulative effect over time can weaken the products materially. Chronic cost-cutting was a major factor behind the horse meat scandal.
Chronic cost-cutting creates an opportunity for new brands to out-premium the premium brands. The Unreal brand launched in the US to reinvent popular food brands, starting with candy, “proving candy can be unjunked”. Their first five products are versions of Reese’s, M&Ms, Peanut M&Ms, Snickers, and Milky Way without the cheaper ingredients (corn syrup, partially hydrogenated oil, etc.).
Just as premium brands are cutting costs, private label seems to be getting better. If brands aren’t careful, the slippery slope of constant cost-cutting can lead to very little differentiation versus cheaper private label.
In the push to increase margins, it’s important to remember that there can be a cost to cost-cutting.
(Marketoonist Monday: I’m giving away a signed print of this week’s cartoon. Just share an insightful comment to this week’s post. I’ll pick one comment at 5:00 PST on Monday. Thanks!)
Here’s another cartoon I drew on chronic cost-cutting in 2007.
