Hidden inflation is the loss of monetary value in money due to the price of products staying the same, but consumers getting less product in return.
For example, the usual price of a bag of instant coffee mix that contains 15 sachets might be $6. After a repackaging effort, that same bag of instant coffee remains at $6 but customers find 14 sachets inside instead of what used to be 15.
So while the price of the product remains the same on the surface, the price per sachet has actually increased from $0.40 to $0.43. Representing a 7.5% price increase for each sachet.
This is hidden inflation.
Hidden inflation is a very common tactic used by companies distributing fast moving consumer products (FMCG) as they are usually affordable and consumers don’t really feel the pinch as the price they pay are not significant.
As in the previous example, while a 7.5% increase in price of any product can be eye-opening, the actual increase in dollars is just 3 cents per sachet… which is still affordable for most households.
Yet the positive impact from the perspective of the supplier can be quite considerable.
As such increases in price are not likely to be met with a significant decrease in demand and sell-through, the increased margin can potentially go a long way towards attaining sales targets and higher margins.
Some of the common products that are observed to come with hidden inflation include:
- Laundry detergent
- Snacks like potato chips
- Menu items of restaurants
- Soft drinks
- Shampoo
- Skin care
- etc
The main reason behind companies going with hidden inflation rather than actual inflation by increasing retail prices is that their customers are price sensitive.
As there are various substitutes and alternatives sharing the same retail space, possibly due to cross-merchandising, a product that is more expensive than a competing product can easily lead to the customer choosing to forgo a particular product and buy the alternative instead.
For example, in the market for ready-to-drink mineral water, it can be said that there is little customer loyalty and that people who buy them straight from the cold refrigerators of convenience stores really only wants to drink some clean plain water.
If a particular bottle of mineral water is $1 and the one beside it is at $0.80, then the odds are that the patron would purchase the cheaper option since they are both probably the same in the mind of the customer.
However, if a bottler chooses to reduce the quantity of the water by 20% and set the price at $0.80 instead, then the chances of a customer buying it would be much higher as it is of the same price as the competitor.
Yet in actuality, a consumer might actually be paying more for each milliliter of drinking water…. but who’s counting.
A manufacturer might also make a product with cheaper inputs and sell at the same price.
This can often be observed in food products where cheaper ingredients with less nutritional value are used to bring down the costs of producing them.
Sometimes to avoid devaluing a brand, manufacturers might introduce new brands of the essentially the same product, but with smaller quantity and lower price.
Hidden inflation is just another product design and pricing strategy that a company has to explore when deciding their approach to the market.
All companies would probably want to deliver as much product as possible to their customers at as low a price as possible.
But these decisions are often not a choice that they can make as they have overheads and operating costs to factor in.
Thus, instead of raising prices and face the prospect of pricing themselves out of the market, hiding inflation can be a shrewd way keep keep the bottom line healthy.
