Addition by Subtraction

The following post was originally published in July 2012.

A number of years ago, an ex-employee of a large consumer packaged goods (CPG) company shared a story with me about the drive for revenue growth in the business.

In an effort to boost year-over-year earnings, the company allegedly increased the size of the hole in the top of its leading dishwashing liquid by an imperceptible 10%.  Research had determined that the average homeowner dispenses liquid soap ‘by the squeeze’.  In the redesign, so the story goes, the new package delivered more volume per wash with the ‘same amount of squeeze’, resulting in faster consumption and repeat purchase.  Instead of disclosing the change, a promotional message was created:  “Now with more suds per wash”.  Urban legend?  Perhaps – but not entirely out of the realm of possibility.

Today, CPG manufacturers are playing similar games with packaging in an effort to hold margins as energy, materials, and ingredients costs increase. This is the ‘addition by subtraction’ method of generating growth – it is price inflation in disguise.  CPG companies have no obligation to advertise such changes, so long as the new packaging accurately shows the size or weight of the product inside.

In contrast, the Financial Services industry is so highly regulated that changes in Terms & Conditions or reduction of benefits often require formal notification (at a minimum) or (worst case) re-enrolment of the customer in the revised product.  As margins in this sector get squeezed from higher insurance claims and loan losses, common remedies to preserve margin are to increase cross-sell/upsell activity, increase rates, or to impose new service fees.

Finally, there is Tim Hortons – the ubiquitous Canadian-based coffee chain – which recently posted a sign at each of its locations saying something to this effect:  “due to rising costs, we will be implementing a modest price increase”.  They even gave their loyal customers a couple of week’s ‘heads up’.

Three businesses.  Three very different approaches to preserve and grow operating margins in these still turbulent times. 

The Bottom Line

While inflating prices is a valid strategic option to protect margins and grow revenue, the winning strategy will be one that looks beyond the next transaction, to the lifetime value of the customer.  Consumers ‘get’ that prices rise.  They also know when they are being treated with respect and candour.  For revenue growth strategies that enhance customer loyalty, contact Stratum Five today.