5 Reasons Why Small Businesses Are Embracing 'Shrinkflation'

5 reasons why small businesses are embracing 'shrinkflation'

A barista handing a takeout coffee cup to a customer in a coffeeshop.

The past few years of supply chain problems and rising prices have been hard on consumers -- but they've also created huge challenges for small businesses. No matter what industry you're in, your small business has likely had to balance higher costs of raw materials, inputs, inventory, and supplies with the need to stay price competitive. Not every business can pass cost increases on to customers. Sometimes businesses need to try a different strategy.

According to a new survey from Clarify Capital, some small businesses are turning to "shrinkflation" -- where they charge the same prices, but sell a smaller size, volume, or quantity of product. The Clarify Capital study found that 12% of small businesses have tried "shrinkflation" as a cost control and pricing strategy -- and another 20% are planning to.

Shrinkflation can be a valid way to stay cost competitive for your customers -- but it poses some big risks, too. But with small business cost structures still high and price-sensitive customers getting more reluctant to reach for their credit cards, some business owners might feel that shrinkflation is their best option.

Let's look at the biggest reasons why small businesses are trying "shrinkflation" in 2024.

1. Profitability (64%)

The Clarify Capital survey found that, among businesses that have tried "shrinkflation," 64% of these small business owners said their reason for using this tactic was "to remain profitable."

Shrinkflation can help improve profitability because it involves charging the same price per unit sold (and receiving the same revenue) while reducing cost per unit sold. Instead of raising prices on your products, shrinkflation keeps sticker prices the same (or only slightly higher), while boosting your profit margins.

2. Production and supply chain costs (44%)

Almost half (44%) of business owners using "shrinkflation" told Clarify Capital that they are doing it "to offset rising production and supply chain costs." The past few years of supply chain disruptions, plus parts and workforce shortages, have been particularly challenging for small businesses. If your business lacks scale and leverage to negotiate a better deal from suppliers, it's easy to get overlooked -- and fall behind on your production goals.

3. Improve business operations (32%)

Nearly a third (32%) of business owners that are employing "shrinkflation" as a strategy said that they're doing it to "keep their business operational." If staying profitable for one more week or month can be the difference between staying in business and going out of business, then shrinkflation might be your best bet to keep more money in your business checking account.

4. Price competition (24%)

Some consumers seem to think that high inflation just means "bigger profits for corporations." But this is not always true for small businesses. Many small businesses struggle to raise prices; they might fear that their customers are more price sensitive than expected, or less loyal to the brand. Business owners often feel pressure from both rising costs of production and financially-stretched customers who can't stomach another price hike.

For these reasons, 24% of small business owners using this tactic said that "market competition/pricing pressure" was one reason why.

5. Less availability of materials (24%)

Supply chain problems are hard for small businesses to overcome, because they put a big kink in the global economy's logistics systems. Depending on what your business makes and sells, you might be relying upon global supply chains to source raw materials, supply parts, and ship these materials to your business facilities. Whatever your small business needs, chances are those materials, supplies, and inputs have gotten harder (and more expensive) to obtain.

And there are massive, complex problems happening all over the global economy right now. The past few months have seen ominous headlines about everything from Houthi rebels cutting off shipping in the Red Sea, to skyrocketing prices of cocoa (bad news for candy companies), to climate change making it harder (and more expensive) to grow crops and commodities like coffee.

With all of these disruptions, costs, and complexities happening, it's no wonder that 24% of businesses implementing shrinkflation said they were doing it because of "decreased product/material availability."

Bottom line

Small businesses are under pressure to stay profitable without raising prices, and they often lack the scale, leverage, and pricing power that big corporations have to charge more. If your business is considering trying "shrinkflation" as a way to hold the line on your customers' sticker prices, you're not alone -- 32% of small businesses told Clarify Capital that they either have implemented shrinkflation, or are planning to do it.

But think carefully about how to implement shrinkflation in a thoughtful, transparent way so you can maintain trust with your customers. The Clarify Capital survey also found that 68% of consumers would consider switching brands in response to shrinkflation. Don't get so aggressive with shrinkflation that you end up driving customers away.

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