Downsizing as an implicit way to in- crease the price.

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Is it effective?

C U S T O M S O L U T I O N S

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W E B S O L U T I O N S

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et tincidunt humo sed ut.

E B U S I N E S S S O L U T I O N S

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Downsizing as an

implicit way to

in-crease the price.

Is it effective?

M.H. Oude Luttikhuis

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UNIVERSITY OF GRONINGEN

FACULTY OF ECONOMICS AND BUSINESS

MSc. Marketing

Master Thesis

Downsizing as an implicit way to increase the price:

Is it effective?

Author: M.H. Oude Luttikhuis (S1868373) Jennerstraat 14 9728 GX Groningen T: +31 (0) 621 910 824 E: M.H.Oude.Luttikhuis@student.rug.nl

1st supervisor: dr. J.E.M. van Nierop

2nd supervisor: dr. ir. M.J. Gijsenberg

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MANAGEMENT SUMMARY

Many companies increase their product prices in order to increase profits or remain profitable in case cost of goods increase. The effect of these price increases, in relation to the price elasticity of consumers, is extensively researched. Another potential marketing strategy companies could execute to increase profits or remain profitable is product downsizing. Downsizing refers to the practice in which the content size of the package is reduced, but the package itself and price are unchanged. Although numerous examples of downsizings exist, in literature this topic is underexplored. The goal of this study is to determine whether a price increase or downsizing the product is a more effective marketing strategy in terms of the additional revenues it would generate. Segmentations are made to detect differences between consumers in reactions to price increases and volume decreases. This points to the following research question:

Is product downsizing a more effective marketing strategy than an equivalent price increase, and do consumer characteristics influence the effectiveness of both strategies?

An alternative specific choice-based conjoint design was conducted based on a questionnaire. Depending on data from 209 Dutch consumers, it appears that, in case of fast-moving consumer goods, consumers are more aware of price increases than decreases in volume given the higher relative importance for price with respect to volume. This higher importance in price was true for all levels of price increases and equivalent downsizings for all six product categories. Based on these findings, it can be concluded that consumers are likely to be more price sensitive than volume sensitive, which gives an indication that companies are likely to generate higher revenues if they downsize their products rather than increasing their prices.

By analyzing the revenues of each brand individually, we found that national brands have the best chance to gain revenues if they either downsize their products or increase the price of their products. To fine-tune the marketing strategy for these national brands as well as to find opportunities for the other brands, consumers were clustered based on age, gender, income, household size, and their perceived price consciousness.

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PREFACE

In June 2012, I graduated from my Bachelor (Business Economics) at the University of Groningen. I had strong doubts in which Master would best fit my interests and capabilities. Therefore, I decided to apply for both Marketing and Strategic Innovation Management.

Now, two years later, I am writing the last sentences of my thesis for both Marketing Management and Marketing Intelligence. Applying for the Marketing Master was a choice I would never regret and I have definitely the intention to become an employee in the field of marketing. However, after writing two Master’s theses the past year, my interest in doing research and writing scientific articles has risen considerably. Therefore, I fully commit in passing my research master next year and endeavor a PhD position in about two years.

I would like to thank dr. Erjen van Nierop for being my supervisor. His guidance and prompt feedback throughout this study proved to be of great help. I would also like to thank my fellow thesis group members for providing me with helpful feedback during our meetings. Finally, I would like to thank my family and friends who greatly supported me during my study.

Albergen, June 2014

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ABSTRACT

This study investigates the effects of downsizings on consumers’ purchase behavior for fast-moving consumer goods. The downsizing effects are compared with equivalent price increases in order to test whether consumers are more price sensitive or volume sensitive. Moreover, a latent class segmentation is presented to distinguish consumer responses based on characteristics of these consumers. Consumers’ choices are obtained conducting six alternative specific choice-based conjoint analyses, each containing three different brands and four price and volume levels. Relying on data from 209 Dutch consumers, we find that consumers more often pay attention to differences in price rather than to differences in the content size of the package; although the price per unit remains unchanged. Within all six product categories, four main segments can be distinguished, which are the Boyalists, MiniMaxers, Female Valuators, and the Quality Seekers. This study reinforces the importance of product downsizing instead of increasing the price of products and suggests further research in this context.

Keywords: Package downsizing; Consumer behavior; Fast-moving consumer goods; Choice-based conjoint analysis; Latent class

1 INTRODUCTION

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intake. Moreover, in a recent study of Zlatevska, Dubelaar, and Holden (2014), a meta-analysis of 67 studies is performed to quantify the effect of content size on the consumption. They found that consumption increases by about 22% when serving size doubles.

Supplying smaller quantities in a package may have its benefits as well. These benefits are related to the price a consumer is willing to pay. Scholars argue that products of smaller package volumes are perceived as more favorable than a similar product in larger packages (e.g. Rao 2005; Yan, Sengupta, and Wyer Jr. 2014), which may positively affect the consumer’s willingness to pay. Besides, Koenigsberg, Kohli, and Montoya (2010) stated that smaller packages will reduce waste and allow consumers to closer match their purchases to the consumption they desire, allowing firms to set higher unit prices. In practice, smaller packages are frequently priced higher per unit than larger packages (French 2003).

Another marketing strategy companies could perform is lowering the volume of a package. This concept is called package downsizing, and refers to the practice in which the content size of the package is reduced, but the package itself and the price of the product are unchanged (Gupta et al. 2007). Package downsizing is a commonly observed practice, especially in the food industry (Çakir and Balagtas 2013). Numerous examples of reductions in content size exist. For example, Dannon reduced its yogurt from 8 to 6 ounces in 2003, the gingerbread from the Dutch brand Snelle Jelle are now packed per 5 pieces, instead of the six-pack in 2012, and Venco downsized its licorice from 13.5 to 12.7 ounces in 2012, while simultaneously increasing its price with 6%.

According to Kotler (2003), “consumers are likely to be more aware of price changes than content size reductions” (p. 497). This is supported by Çakir, Balagtas, and Okrent (2013), who found that sensitivity toward price changes is higher than the sensitivity toward volume changes. The primary reason for downsizing is to accommodate increases in manufacturing costs (Adams, Di Benedetto, and Chandran 1991). Another reason is to respond to demographic changes or changes in lifestyle (Adams et al. 1991). Finally, downsizing may increase the purchase frequency (Adams et al. 1991). This increase in purchase frequency is supported by Çakir and Balagtas (2013). They found that household expenditures were considerably higher after downsizing peanut butter and shelf stable tuna than it was at its original content size. In this study, we will focus on the effects of downsizing various fast-moving consumer goods and compare these downsizings with equivalent price increases for these products.

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equivalent increase in the price of a product. However, both studies only test one or two products of one or two downsize scenarios. Therefore, generalizability of these results for all fast-moving consumer goods at any level is rather low. In this study, we use downsizings and price increases ranging from 3% to 30% for 18 different products. We aim to provide managers with more knowledge about the concept called package downsizing as a tool for generating additional revenues. Besides, we analyze the role of consumer characteristics on this marketing strategy. This study should lay the foundation for further research in this underexplored topic. Our research question is as follows:

Is product downsizing a more effective marketing strategy than an equivalent price increase, and do consumer characteristics influence the effectiveness of both strategies?

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2 CONCEPTUAL BACKGROUND

As cost of goods increase, manufacturers have the tendency to pass on these costs to the consumer by increasing its product prices. Many authors have investigated the effects of price increases on the demand (see Tellis 1988; Bijmolt, Van Heerde, and Pieters 2005). Reducing the volume of the package is another, yet less obvious, strategy to anticipate the increasing costs. Research generally focuses on the actual content size of the package (e.g. Fowler 1982; Folkes et al. 1993; Wansink 1996; Koenigsberg et al. 2010), or consumer’s quantity perceptions (e.g. Granger and Billson 1972; Russo 1977; Binkley and Bejnarowicz 2003). Only few studies focus on package downsizings. Adams et al. (1991) mentioned several advantages of downsizing the package, and Gupta et al. (2007), in contrast, discussed the ethics behind package size reductions. Only few studies exist that actually tested the effect of downsized products. First, Çakir and Balagtas (2013) explored the effect of downsizings of peanut butter and shelf stable tuna. They concluded that household expenditures were considerably higher after the downsizing than before the reduction in content size. In addition, Çakir, Balagtas, and Okrent (2013) analyzed two package downsizings in the U.S. bulk ice cream industry. They found that consumers are on average about four times more sensitive to changes in price than to changes in package size.

2.1 Price Increase or Volume Decrease

In determining the most profitable strategy for fast-moving consumer goods, we first examine the effectiveness of price increases. After that, the effectiveness of downsizings is scrutinized. Subsequently, we will compare the two strategies to determine which one is most effective based on the additional revenues both strategies are expected to generate.

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(Kalyanaram and Urban 1992). Therefore, consumers will not always be aware of a price increase. These arguments may indicate that to a certain point, increases in price can generate higher revenues and, hence, can be an effective strategy.

Another potential profit-generation mechanism is package downsizing. Again, a reduction in the size of the package without reducing the price will negatively affect the sales. This is due to the increase in price per unit, which decreases the actual product value. However, a small reduction in the content size without changing the price or the package itself will barely change the perceived value of the product (Granger and Billson 1972), since consumers may not notice a difference. Given these facts, downsizing the products may to a certain degree increase revenues for companies. This is supported by Adams et al. (1991), who had cited numerous companies that did not notice a significant reduction in long run sales after downsizing their products. This assertion is in line with outcomes of several product downsizings. For example, Dannon decreased its package size for the Indonesian market in 1998 and reported an increase in sales (Ang 2000). Unilever performed the same strategy for a certain number of its existing brands in Europe, and noticed a 1.1% sales increase in the first half of 2012, after years of stagnation (Global Retail Magazine, 2013).

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used weight identifications on the package as a criterion in their purchase decision process (MORI 1997). Most consumers use alternative methods to determine the quantity of the package. Consumers tend to rely more on for example the visual judgment of the package, the total package price, or previous purchase experiences. Visual judgments about the quantity of the package, however, are most of the time not accurate. Many studies (e.g. Nieder, Freedman, and Miller 2002; Lautrey, Mullet, and Pagues 1989) provide clear evidence that consumers misjudge the actual quantities. Consumers also rely more on the total package price than on the content size of the package. Schulz (2003) found that the past few years, the demand for low prices is an important consumer’s need. This finding is supported by numerous studies about consumers and their high sensitivity toward increases in price (e.g. Monroe and Cox 2001; Sirvanci 2011). In addition to this, maintaining the price at an existing level may be beneficial in two ways. First, according to Monroe and Petroshius (1981), consumers have a certain price threshold. This is a consumer’s range of prices that are acceptable for a product. Second, Monroe and Cox (2001) argue that consumers may remember the price of the previous purchase for a product or product category. This price is set as reference price for the next purchase. For these reasons, downsizing the package may be a better strategy than increasing the price of the product in terms of the revenue both strategies would generate.

2.2 Control Variables – Consumer Characteristics

Although we expect downsizings to generate more revenues than price increases, the direction and strength may differ if we take into account particular characteristics of consumers. In this section, we examine the effects of age, gender, income, and household size on the effectiveness of both marketing strategies. We think these variables are likely to influence consumer’s response toward price increases or downsizings. Besides, we have included price consciousness to test whether perceived behavior replicates actual behavior.

2.2.1 Gender

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more expensive products than for lower-priced products. On the other hand, switching to other brands is also a risk as you are probably less familiar with these brands. Therefore, it is also possible that risk-averse consumers will not switch at all.

2.2.2 Income

According to economic theory, budgetary constraints are greater for consumers with lower incomes. This would imply that these consumers are more price sensitive than consumers with higher income levels. Prior studies indeed found that price search is negatively related to the income a consumer receives (e.g. Marvel 1976; Wakefield and Inman 2003; Inman, Winer and Ferraro 2009). Therefore, consumers with higher incomes are likely to be less sensitive toward downsizings and price increases as compared to consumers with lower incomes.

2.2.3 Age

Age is presumed to have direct influence on a consumer’s risk assessment and perception, which in turn affects willingness to pay (Misra, Huang, and Ott 1991). As age increases, consumers become more experienced. This gain in experience can have opposing effects for the response toward price increases or size decreases. On the one hand, purchase decisions for the fast-moving consumer goods may become more based on habits and, hence, repeat purchases. A reason for this is that as age increases, one becomes more experienced with buying particular products. Therefore, as age increases, a consumer may generally be less aware of changes in price and/or volume, resulting in a lower sensitivity toward price increases or size reductions. On the other hand, as consumers become more experienced, they are likely to be more familiar with the price and content of the products. From this point of reasoning, older consumers may be more aware of changes in price and/or size, resulting in a higher price or volume sensitivity.

2.2.4 Household Size

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products if the size decreases. We do not expect that size of the household affects response toward price increases.

2.2.5 Price Consciousness

We expect that perceived consumer behavior replicates actual behavior. Therefore, consumers that perceive themselves as price conscious are likely to more heavily switch to other brands in case of a price increase or a package downsizing than consumers that perceive themselves as less price conscious.

2.3 Control Variables – Product Characteristics

To increase the validation of our research, we have included various brands and product categories. We expect that a consumer’s reaction on a price increase or downsizing depends on these two variables.

2.3.1 Product Category

Consumers may respond differently toward a price increase or a package reduction for different categories. As Tellis (1988) mentioned, price elasticity differs significantly over product categories. A reason for this may be that the level of involvement varies across product category (Nijssen 1999). Therefore, it is expected that price increases have different effects for different product categories. We expect that these different effects will also apply for downsizings.

2.3.2 Brands

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3 METHODOLOGY

To determine whether the price or the content size has a stronger effect on consumer’s purchase decisions for fast-moving consumer goods, we calculate the relative importance for both attributes for every product category used in this study. Subsequently, we distinguish different consumers based on their age, income, gender, household size, and price consciousness. To determine this relative importance and optimize the marketing strategy for product downsizings, we will make use of a choice-based conjoint (CBC) analysis. Conjoint analyses have extensively been used in marketing for eliciting consumer preferences (e.g. Hennig-Thurau et al. 2007; Gil and Sanchez 1997). Optimization models, in turn, often use consumers’ preferences as an input for assortment decisions (e.g. Chen and Hausman 2000; Kraus and Yano 2003; Scholl et al. 2005; Rusmevichientong et al. 2010).

We chose a CBC design instead of a rating or ranking design, because choice tasks are more direct and specific (Huber 1997). Moreover, a CBC analysis has the potential to forecast demand accurately and, more important, this hypothetical approach leads to decisions about pricing that are not significantly different from consumer’s decisions based on real purchase data (Miller et al. 2011, see also Louviere and Woodworth 1983). A respondent can choose the best deal based on a choice set of three stimulus and a “none” choice option. We include a “none” option, since we are not interested in consumers choosing for particular products that they will actually never buy. This is in line with Karni and Schwarz (1977) who suggest that including a no-choice option should be chosen when continuing the search is beneficial, or when none of the alternatives are seen as attractive.

3.1 Establishing the Attributes

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We will analyze six product categories, in which each category contains three different products. We have included the attributes brand, price, and volume. These three attributes

have three or four levels. This gives rise to 48 possible scenarios1. However, as there are some

prohibitions between levels of price and volume, in practice only 21 scenarios are possible2.

Given that we have six product categories, one would be depleted to respond to all of these alternatives (see Bech, Kjaer, and Lauridsen 2011; Louviere and Woodworth 1983). Therefore, an orthogonal main-effects design is produced, which decreases the number of choice sets to five per product category. This results in thirty choice sets. There is no general rule for the optimal number of choice sets in a survey, but according to Johnson and Orme (1996), you could easily ask more than 20 choice sets. In fact, later tasks are completed much faster by respondents. This better reflects the reality, since buying fast-moving consumer goods is a buying situation characterized by low consumer involvement (Nijssen 1999).

3.1.1 Brand

Every product category consists of three different brands. In every choice set, each brand is shown once. See Table 1 for a detailed description of the products used in each product category.

3.1.2 Volume

The attribute volume includes four attribute levels. For each two product categories, we used different volume levels in order to optimize downsize decisions. The products ‘raspberry fruit syrup’ and ‘salami frozen pizza’ have volume levels of 100%, 97%, 94%, and 91% the original content size. The products ‘paprika potato chips’ and ‘penne rigate’ have levels of 100%, 95%, 90%, and 85% the original package volume. Finally, ‘pure chocolate flakes’ and ‘filter coffee’ have levels of 100%, 90%, 80%, and 70% the original volume. Downsizings of 3% to 30% will be analyzed, because company’s level of downsize is often within this range. Two products per percentage interval are used to test for product category effects.

3.1.3 Price

To capture consumer preferences with regard to the price, we use four attribute levels for each product. Again, each product has different levels of price increases. We have calculated the price per unit for every decrease in content size to determine at which levels the price is equivalent to a certain size.

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Table 1. Products categories, brand levels, and attribute levels for price and volume

a_{Original value} b _{Downsizings are 3%, 6%, or 9%.} c Downsizings are 5%, 10%, or 15%. d_{Downsizings are 10%, 15%, or 20%.} e Product Category Brand Attribute Levels

Price Attribute Levels Volume Attribute Levels

1. Pricea 2. Pricee 3. Pricee 4. Pricee 1. Volumea 2. Volume 3. Volume 4. Volume

Potato Chips Pepperc

A. Lays 1.16 1.22 1.29 1.36 225 214 203 191 B. Croky 1.09 1.15 1.21 1.28 200 190 180 170 C. Albert Heijn 0.90 0.95 1.00 1.06 200 190 180 170

Chocolate Flakes Pured

A. De Ruijter 1.18 1.31 1.48 1.69 300 270 240 210 B. Fair Trade 1.88 2.09 2.35 2.69 300 270 240 210 C. Albert Heijn 1.00 1.11 1.25 1.43 300 270 240 210

Fruit Syrup Raspberryb

A. Karvan Cevitam 2.73 2.81 2.90 3.00 75 73 71 68 B. Raak 1.29 1.33 1.37 1.42 75 73 71 68 C. Slimpie 1.88 1.94 2.00 2.07 58 56 55 53 Filter Coffeed A. Fair Trade 2.61 2.90 3.26 3.73 250 225 200 175 B. Douwe Egberts 4.98 5.53 6.23 7.11 500 450 400 350 C. Albert Heijn 2.62 2.91 3.28 3.74 500 450 400 350 Penne Rigatec A. Garofalo 1.79 1.88 1.99 2.11 500 475 450 425 B. De Cecco 1.99 2.09 2.21 2.34 500 475 450 425 C. Grand’Italia 1.17 1.23 1.30 1.38 500 475 450 425 Frozen Pizza Salamib

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3.2 Presenting the Stimuli

According to Vriens et al. (1998), experimental tasks must be highly similar to the actual way consumers make their choices. Using pictorial representations can enhance the external validity in product categories where visualization is important in consumer decision-making process (Srinivasan, Lovejoy, and Beach 1997). Consequently, the package itself is graphically represented on the top of each alternative in the consideration set. This will ensure that attributes, such as the shape of the package or the colors of the package are also included. For convenience, we call this attribute ‘brand’. We also used a pictorial representation for the price and volume in such a way that it looks like a price label. In Appendix I, examples of choice tasks as well as the other questions in the survey are provided.

3.3 Sample

3.3.1 Sample Selection

Our sample is built using an internet-based questionnaire distributed through social media. The initial sample obtained consists of 273 respondents. Respondents are excluded from the sample if: (1) the questionnaire is incomplete; (2) less than two minutes is taken for completing the questionnaire; (3) illogical answers are found, or (4) year of birth is higher than 1997. The final sample includes 209 respondents. Johnson and Orme (1996) suggest that the sample size for aggregate-level full-profile CBC modeling is set at:

where n is the number of respondents, t the number of tasks, a the number of alternatives per task (excluding the no-choice option), and c the number of analysis cells. 209 respondents filling in 5 choice tasks of 3 alternatives per choice set, with a c of 4 results in:

Therefore, our final sample has a sufficient size to assume that our generated results are reliable.

3.3.2 Sample Description

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euro. Price consciousness is measured using four items, as is shown in Table 3. Internal consistency reliabilities were established using the Cronbach’s alpha. This reliability measure exceeded the commonly used cut-off of 0.70. Therefore, we will use the average of these four items as a new variable for measuring price consciousness. The average price consciousness of our sample is 4.38 on a scale of 1 to 7.

Table 2. Descriptive statistics and correlation matrixa

a n = 209 1 proportion of men * p < 0.05; ** p < 0.01; *** p 0.001

Table 3. Measuring Price Consciousness

Concept Items Cronbach’s alpha

Degree of Price Consciousness

• In the supermarket, I tend to buy the lowest-priced brand that will fit my needs.

0.921 • In the supermarket, when buying a product, I look for the

cheapest brand available.

• When it comes to buying a product in a supermarket, I rely heavily on price.

• Price is the most important factor when I am buying a product in a supermarket.

4 RESULTS

In this section, we first present the results on aggregated level. This is necessary in order to test for significant differences between price increases and equivalent downsizings. Subsequently, we will calculate the revenue for each product to detect potential opportunities for companies when downsizing or increasing the price of the products. Finally, latent class is used to segment the consumers and optimize a company’s marketing strategy.

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4.1 Aggregate Level Preferences

In Table 4, the preferences and the attribute’s relative importance for each product category are presented. Brand, price, and volume are all nominally scaled since the model fit is best (lowest AIC and AIC3 for all product categories; lowest BIC for four out of six categories). The most important conclusion that can be drawn from this table is the fact that the relative importance for price is always higher than for volume. As a consequence, on aggregated level, content size decreases seem to be more effective than price increases. This becomes more visible in Figure 1. In this figure, the preferences for price and volume are compared at each level and each product category. For every level in a particular product category, we see that the “preference for price” is lower than the “preference for volume”. This suggests that consumers react stronger on changes in price than changes in content size. This figure also shows that the difference between relative importance of price and volume becomes higher as the marketing strategies become more aggressive; we see that fruit syrup and frozen pizza, potato chips and penne, and chocolate flakes and filter coffee have somewhat the same preference ranges at each level. To test whether these differences in preference for price and volume are significant, we conducted a paired samples t-test. The results are presented in Table 5. Although we only have six measurements, as we have only six product categories, the results are consistent. The table shows insignificant correlations for all three pairs. This means that the response toward price increases and content size decreases is likely to be dependent on the product category and/or the degree of price increase or content size decrease. Furthermore, significant differences are found between each pair. This gives an indication that consumers indeed are more aware of price increases than decreases in content size. Therefore, downsizing on aggregate level seems to be a more effective marketing instrument than equivalent increases in price for products in a supermarket.

4.2 Product Level Revenues

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Table 4. Preference and relative importance of attributes

Attri- Attri- _Preference _Range Relative Importance

bute _{bute Potato Chocolate Lemo-}

Coffee Penne Pizza Potato Chocolate Lemo- Coffee Penne Pizza Potato Chocolate Lemo- Coffee Penne Pizza

Level Chips Flakes nade Chips Flakes nade Chips Flakes Nade

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3%, 6%, and 9% cut-offs/price increases

Figure 1. Importance for price and volume

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Table 5. Paired samples t-test

Therefore, we will not use a linear model for price. Since we are still interested in the best strategy for each brand, we have calculated the revenues by multiplying the number of respondents that have chosen for a particular product composition by the price per unit (i.e. price per kilogram or liter) for the corresponding price/volume level. We have modified this revenue based on the original content size of the product to allow for comparisons between the products. In Table 6, these revenues are provided. For most brands, downsizing the package or increasing the price is an ineffective strategy as revenues will be reduced. However, some brands can increase revenues on aggregated level.

4.3 Latent Class Analyses

Although it appears that for many products keeping the original price and size will generate the highest revenues, for particular consumers this may be not the case. Individual choice behavior does not only depend on observable attributes, but also on latent heterogeneity. To detect consumer heterogeneity in choice for a brand at particular price and volume levels, we use a latent class model. This segmentation, based on consumer characteristics, is recommendable since one can reveal the most profitable segments, which will refine a company’s marketing strategy.

4.3.1 Model analyses

In the A-tables of Appendix II, the statistical summary for K = 1 to 10 latent classes are presented for all product categories (many classes to avoid local maxima). Each respondent belongs to one of K groups, each of which contains persons with similar choice pattern. Based on BIC and CAIC values (best model in bold), five segments have to be included in the model for all product categories. We will not use a higher number of segments (best AIC and AIC3) due to the low class memberships and deteriorating managerial implications.

Pair Mean

Standard

T Df Sig.

Correlations

Deviation Cor. Sig.

Price 1 – Volume 1 -0.215 0.159 -3.309 5 0.021 -.083 0.876

Price 2 – Volume 2 -0.265 0.225 -2.887 5 0.034 -.438 0.384

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Table 6. Revenues per brand

1_{PI = Price Increase} 2_{SD = Volume Decrease}

Potato Chips Chocolate Flakes Lemonade Filter Coffee Penne Rigate Frozen Pizza

Lays Croky AH De Fair AH Carvan Raak Slim- Fair DE AH Garo- De Grand' Dr. Casa di AH

Ruijter Trade Cevitam pie Trade Falo Cecco Italia Oetker Mama

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The five segments, including their segment size and preference for every attribute level are shown in the B-tables of Appendix II. For all categories, segment one has the largest magnitude (ranging from 37% to 66%), whereas segments four and five clearly have lower segment sizes (between 1% and 15%). In determining a brand’s optimal strategy, the size of the segment should be taken into account. For most product categories, we did not analyze the fifth segment since it appears that within these segments, consumers filled in the questionnaire rather randomly. We have not removed these respondents since we do not want to lose information about the filter coffee category, for which consumer did check for price. Besides, going to four segments will decrease the accurateness of the segments. The C-tables of Appendix II presents the relative importance of the attributes in every segment. Based on this and the segment descriptions (D-tables in Appendix II), we have tried to provide a general overview of the segments, generalizable for all product categories (see Table 7). Although we will come up with segmentations generalizable for all product categories, we use the potato chips category as an example for providing specific managerial implications.

4.3.2 Segment specification

4.3.2.1 Segment 1: Boyalists

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Table 7. Latent Class Segmentation

1 = All attributes are of equal importance (10% range). 2 = Attribute brand is most important.

3 = Attribute price is most important 4 = Attribute volume is most important

5 = Attributes price and volume are both most important (5% range). 6 = National brand is most important.

7 = Lowest-priced brand is most important. 8 = Fair/biological brand is most important.

9 = Downward sloping relation for preference and attribute level for price. 10 = Downward sloping relation for preference and attribute level for volume.

Boyalists MiniMaxers

Female Valuators

Quality

Seekers Price Checkers

Potato Chips 2 and 6 2, 7, 9, and 10 5, 7, 9, and 10 2, 6, 9, and 10 3 and 6

Chocolate Flakes 2, 6, and 9 2, 7, 9, and 10 5, 6, 9, and 10 1, 8, 9, and 10 1 and 7

Lemonade 2 and 6 2 and 7 5, 7, 9, and 10 2 and 6 1 and 6

Filter Coffee 2, 6, 9, and 10 2, 7, 9, and 10 5, 9 and 10 2 and 8 3, 8, 9, and 10 Penne Rigate 2, 6, 7, 9, and 10 5, 6, 7, 9 and 10 5, 6, 7, and 9 2, 8, 9, and 10 1

Frozen Pizza 2, 6, 9, and 10 2, 7, 9, and 10 4, 6, 9 and 10 2, 6, and 10 1 and 7

4.3.2.2 Segment 2: MiniMaxers

Members in this segment put the highest emphasis on brand; except for the penne category. These consumers can be seen as quite price sensitive since for consumers in this segment the cheapest brand tends to be favored. This is in line with their perceived price consciousness, which is rather high. Consumers in this segment are mainly young men with a low income and a small household size. For the potato chips category, consumers in this segment are especially attractive for the private label of Albert Heijn. If consumers choose for Lays (second best option) instead of Albert Heijn, their preference decreases with 3.116. This indicates that if Albert Heijn decides to increase its price from €0.90 (original price) to €1.06 (third price level), MiniMaxers are still likely to prefer AH potato chips over Lays potato

chips3. The same is true for a package downsizing to 180 gram (second level downsizing)3.

4.3.2.3 Segment 3: Female Valuators

Consumers in the third segment do not care much about the brand. They are very price and volume sensitive given the high relative importance for all categories for price and volume.

3

Choice set J:

J1 = {Lays, €1.16, 225 gram}

J2 = {Albert Heijn, €1.06, 200 gram}

J3 = {Albert Heijn, €0.90, 180 gram}

V1 = 0.191 + 2.090 = 2.281

V2 = 3.307 – 0.909 = 2.397

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To underline this for the potato chips category, the preference for the Albert Heijn brand is highest. At its original level, price per unit is lowest for the potato chips of Albert Heijn compared with the brands Lays and Croky. Female Valuators can best be described as women of higher ages with an in general large household. As is in line with the preferences within this segment, price consciousness is very high. Given their high price sensitivity, companies that think of increasing the price of a product or downsize a product should not highly focus on these Female Valuators. If companies decide to increase the price per unit, many of these consumers will switch to other brands as their brand loyalty is not very high.

4.3.2.4 Segment 4: Quality Seekers

For consumers in the fourth segment, brand is highly important. For the potato chips category, Croky is highly preferred over the other two brands. Besides, consumers within this segment have a high preference for Slimpie lemonade over Carvan Cevitam and Raak lemonade. When buying a frozen pizza, consumers are likely to choose for Casa di Mama instead of Dr. Oetker or the private label of Albert Heijn. Furthermore, fair and/or biological brands are highly preferred within this segment. The Fair Trade brand is preferred in both the chocolate flakes category and the filter coffee category. The biological penne of De Cecco is preferred within the penne category. Since their high preference for particular brands, price and volume are less important in general. As can be expected, consumers in the fourth segment have a fairly low perceived price consciousness. The Quality Seekers are young men and women with average incomes and household sizes. For the potato chips category, price is slightly more important than the volume, which is interesting for the brand Croky as consumers in this segment highly prefer Croky over the other two brands. Switching to another brand will decrease consumer’s utility with 10.503 or 10.144 for respectively Lays and AH private label. As a consequence, Croky has many possibilities for pricing and downsizing strategies. However, since segment size is only 7%, we recommend Croky to not entirely focus on this segment.

4.3.2.5 Segment 5: Price Checkers4

For consumers in the fifth segment, it seems that they filled in the questionnaire rather randomly. In four out of six product categories, the consumers have no distinct preference for brand, price or volume. Besides, in five out of six categories preferences for price and volume are not decreasing as the extent of downsizing or price increases becomes higher, which is

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very illogical as the price per unit will increase at higher price levels and lower size levels. The filter coffee category may be the only product category which is interesting within this segment. Consumers find price as most important, closely followed by the brand; Fair Trade is the most preferred brand. Apparently these consumers barely look at the content size of the package. This segment for filter coffee consists mainly of average aged males that have a low income and a household size of not more than two. They perceive themselves as not very price sensitive.

5 DISCUSSION

Many examples of package downsizings exist. The decision to reduce the volume of a package depends on the differential consumer response to changes in price and volume. Although literature about price elasticity is extensive, studies about downsizings as a marketing tool for generating higher revenues are limited. This study is the first that tries to generalize the effects of downsizings for all fast-moving consumer goods. To do so, we conduct choice-based conjoint analyses for six product categories among 209 Dutch consumers.

We specify revealed preference models that explicitly capture consumer response to changes in price and package size. Volume reductions are between 3% and 30%, which is in line with most current downsizings. At each level, equivalent price increases are calculated. We account for consumer heterogeneity by conducting latent class segmentations.

A main finding is that consumers seem to be more price sensitive than volume sensitive; for every level at every product category we see that the preference is higher for volume than for price. This means that at a price increase and an equivalent volume decrease, consumers are more likely to choose for the product that had a decrease in content size than for the product that was higher priced (although price per unit was the same). This has an important managerial implication. In competitive markets, managers may have only limited ability to increase the price without harming sales. Moreover, as mentioned by Monroe and Petroshius (1981), consumers have a certain price threshold. For these reasons, downsizing the package can be a viable marketing strategy in order to accommodate for increases in production costs, and thereby maintain or increase profits.

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gram. We recommend Carvan Cevitam to decrease the content size of a bottle of lemonade with 3%. For filter coffee, Fair Trade can increase revenues by increasing the price of their filter coffee with 10%. Douwe Egberts can also generate higher revenues. The best way to do this is downsizing their 500 gram pack of coffee to 400 gram. Finally, Grand’Italia can slightly increase their revenues by downsizing their package to 425 gram. If we take a closer look to the type of brands for which downsizing or increasing the price generates additional revenues, we see that this is only the case for national brands. As numerous studies has pointed out, price elasticity is higher for private label brands than national brands (e.g. Hoch 1996; Fowler 1982).

Although maintaining the original price and size generates in most cases the highest revenue, companies can focus on particular consumers that generally are more loyal to the brand in order to increase revenues. Therefore, we have provided latent class segmentations. Although segmentation shares are somewhat different between categories, we have obtained four segments in which consumers respond practically in the same way for every product category. Again, the results have important managerial implications. First, managers of national branded products that already have the highest market share within the product category should focus on the Boyalists. These consumers are very loyal to the brand and, hence, price increases or volume decreases may generate higher revenues. Given that for most categories downsizings have a lower relative importance than price increases, reducing the size of the package is likely to be more effective than a price increase. Companies that offer private labels should mainly target the MiniMaxers. These consumers are generally purchasing products that have the lowest unit price. Companies of other national brands that do not have the highest marketing share within a product category, and biological or fair products should focus on the quality seekers. These consumers are highly loyal to the brand and not extremely price or size sensitive.

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with our argumentation about gender and their switching behavior to other brands. As Graham et al. (2002) mentioned, women are more risk-averse than men. Apparently, for women, the financial risk (paying more for the same or paying the same for less) outweighs the risk for the unknown (switching to unfamiliar brands).

It is also interesting to see the reaction of the Price Checkers for the coffee category. This category has a segment size of 15% and highly value low prices given the high importance of this attribute. However, volume is not important at all. We found an explanation for this by looking at the content sizes of all alternatives. The original content size for Douwe Egberts and the private label of Albert Heijn coffee is 500 gram. However, the Fair Trade coffee, which is most preferred within this segment, only has a content size of 250 gram. Since the pictures within the conjoint analysis were of the same size, these consumers probably did not check for the volume at all (although they mentioned they did). However, they did check for the price and, hence, these consumers are likely to base the volume of the package on visual judgments. This is in line with the findings of Lennard et al. (2001) and MORI (1997) who argued that consumers do not always use quantity indications on the package (or in this case, the quantity indications on the price labels). For companies that focus on these consumers, it is probably interesting to decrease the content of the package. However, the actual shape of the package itself should barely change in order to keep unaltered consumer’s visual judgment of the content.

Our empirical analysis has taken a first step toward analyzing consumers’ volume sensitivity for packages and represented a first approach to answer the previously unaddressed, albeit important, question of which marketing strategy is more effective in terms of generating highest revenues. Although our study provides clear evidence for the, in general, higher effectiveness of product downsizings as compared to price increases, some determinants possibly affected the accuracy of our results.

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Figure 2. Category shares sample vs Dutch population

In the first graph of this figure, we see that at high income levels the sample data is a

reasonable representation of the population. However, at a disposable income of less than 10.000 euro, our sample is considerably different from the Dutch population. Students are also likely to live with (many) other students, which probably explains the imbalance in the second graph of Figure 2. It is possible to reweight the sample. This reweight should imply that respondents older than 50 should count for almost twenty times as much as respondents between 17 and 29. Segmentations became pretty different after reweighting the sample, probably because of the low number of respondents of higher ages. Therefore, we did not reweight the sample. Although exact descriptions of the segments are not valid, segments are useful as differences between segments can still be found.

Second, we have to emphasize that this study involves a replication of a real purchase situation. We used three different products for each product category. However, in a real purchase situations, there might be some more alternatives from which a consumer can choose (i.e. other type of products, flavors, brands, or content sizes). Furthermore, this replication neglect other effects influencing consumers’ decision-making such as where the product is placed on the shelf, the breadth and depth of the assortment, or the time consumers have. Finally, we did not provide any price per unit information. Some supermarkets actually provide the unit prices. If price-per-unit information is available. consumers will be aware of the actual value of the product and. as a result. consumers switch more heavily to larger packages (Granger and Billson 1972). Russo (1977) confirms this by studying the effects of

0 5 10 15 20 25 30 35 40 1 2 3 4 ≥ 5 Per ce n tage (% )

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revealing the unit price for grocery items. He found that consumers were highly sensitive to the unit cost when that unit cost was revealed. If this information is provided, consumers can better compare the value of these products. As a consequence. downsizing a product or increasing the price of a product will be noticed more rapidly, which may imply that consumers will switch earlier to other products after particular price increases or volume decreases.

Third, we found some differences in response between the lemonade and penne category, and the other four categories. For the lemonade and penne category, brand is more important than for the other four categories. Two rationales are given for this higher importance for the brand. First, the alternatives may not be that preferable. To give an example, Grand’Italia is a national brand, but was also the lowest-priced brand. Besides, for these two product categories, downsizings and price increases were only up to nine percent, implying that consumers may react less aggressively on these changes in price and volume.

A reason why companies may still choose for price increases instead of volume reductions could be that manufacturing costs will increase, as production should be adapted to the new product size. Second, if consumers observe a downsizing, they may be more switch to other brands than when observing a price increase. Gupta et al. (2007) support this believe and argue that downsizings are perceived as more unethical than price increases. Companies that according to consumers conduct unethical behavior, will experience a decline in profits (Creyer and Ross 1996). However, we want to emphasize that downsizing the product is not that unethical as you may think. As we have mentioned, many studies found support for the positive relation between portion size and the use of the product (e.g. Zlatevska et al. 2014; Ello-Martin et al. 2005; Folkes et al. 1993; Worchel et al. 1975). Given this positive relation, together with the fact that food marketing highly contributes to the heightened prevalence of obesity (see Chandon and Wansink 2012; Glanz, Bader, and Iyer 2012 for reviews), we consider downsizing as far from unethical. A third reason may be that research about downsizing is limited. If the advantages of downsizing over price increases become more grounded by means of extensive literature, more companies will probably use downsizings instead of price increases.

6 CONCLUSION

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products ranging from 70% to 97% its original size with equivalent price increases. For low-involvement decisions, consumers are on aggregated level more price sensitive than volume sensitive. Figure 1 shows these differences in sensitivities. In Table 5, we found that these differences in price and volume were significant for all levels. As the marketing strategy becomes more aggressive, this difference becomes even higher. We contribute to the existing literature by showing a higher importance for the attribute price than for the attribute volume, which indicates that consumers will rather buy a downsized product than a product that is higher priced than before (given that price per unit is the same). After conducting latent class analyses, we found four main segments. These segments are generalizable for all six categories as were investigated in this study. We recommend national brands that have the highest market share within a product category to focus on the Boyalists. Besides, brands offering lower-priced products are advised to focus on the MiniMaxers. Finally, other brands, such as brands of fair trade or biological products, should target the Quality Seekers.

As this study has shown, volume elasticity is a topic that is interesting to investigate. More research is needed to come up with optimal strategies for companies that think about downsizing their products. What we already can obtain from this study is that companies should focus either on the Boyalists, the Minimaxers, or the Quality Seekers, depending on the type of brand they offer. To target the type of consumers within these three segments, more research is needed about the exact consumer characteristics representative to the population. For both, calculating optimal strategies and describing the segments, we strongly recommend the use of real purchase data.

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APPENDIX I – QUESTIONNAIRE

1. What is your gender?

☐ Male ☐ Female

2. What is your year of birth?

________

3. What is your current place of residence? ________________________

4. Including yourself, how many persons are in your household?

___ person(s)

5. What is your yearly disposable income?

☐ Up to 10.000 euro

☐ Between 10.000 and 20.000 euro ☐ Between 20.000 and 30.000 euro ☐ Between 30.000 and 40.000 euro ☐ Between 40.000 and 50.000 euro ☐ More than 50.000 euro

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7. If this where the only options for potato chips, which one of these products has your preference?

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9. If this where the only options for lemonade, which one of these products has your preference?

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11. If this where the only options for penne rigate, which one of these products has your preference?

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13. Please indicate how familiar you are with the products used in this study (in terms of name and any experience).

Completely unfamiliar

Completely familiar

1 2 3 4 5 6 7 Lays Potato Chips

Croky Potato Chips Albert Heijn Potato Chips De Ruijter Chocolate Flakes Fair Trade Chocolate Flakes Albert Heijn Chocolate Flakes Karvan Cevitam Lemonade Raak Lemonade

Slimpie Le monade Fair Trade Filter Coffee Douwe Egberts Filter Coffee Albert Heijn Filter Coffee Garofalo Penne Rigate De Ceccio Penne Rigate Grand’Italia Penne Rigate Dr. Oetker Frozen Pizza Casa di Mama Frozen Pizza Albert Heijn Frozen Pizza

14. Please indicate how often you buy the products in this survey (monthly). Never 1x 2x 3x 4x 5x More than per month per month per month per month per month 5x per month

Lays Potato Chips Croky Potato Chips Albert Heijn Potato Chips De Ruijter Chocolate Flakes Fair Trade Chocolate Flakes Albert Heijn Chocolate Flakes Karvan Cevitam Lemonade Raak Lemonade

Downsizing as an implicit way to in- crease the price.

Is it effective?

Downsizing as an

implicit way to

in-crease the price.

Is it effective?

M.H. Oude Luttikhuis

UNIVERSITY OF GRONINGEN

FACULTY OF ECONOMICS AND BUSINESS

MSc. Marketing

Master Thesis

Downsizing as an implicit way to increase the price:

Is it effective?

MANAGEMENT SUMMARY

PREFACE

TABLE OF CONTENTS

ABSTRACT

1

INTRODUCTION

2

CONCEPTUAL BACKGROUND

3

METHODOLOGY

4

RESULTS

5

DISCUSSION

6

CONCLUSION

7

REFERENCES

APPENDIX I – QUESTIONNAIRE