When tasked with generating more profit, downsizing is a great alternative to taking a price increase. Downsizing lowers the cost of goods by reducing raw materials, packaging, and creating production efficiencies.
Observations show that using a downsize strategy results in approximately ½ the impact to price elasticity vs. taking price up.
Downsizing is often used in years when visible price cannot be taken.
Downsizing occurs when a manufacturer reduces costs by removing a marginal amount of volume from every unit sold of a given product. This can be done by either taking out a fixed number of items (Ex. Removing 2 coffee pods from a 20 pack), or by reducing the total volume (Ex. Removing 20mL of shampoo). Downsizing often comes with reducing packaging size as well, often saving additional manufacturing costs.
Downsizing can open up production opportunities by consolidating pack sizes and reducing changeover times at plant level.
There is 1 thing in common with all CPG downsizes; Regular Price & Promo Prices remain constant. Downsizing is an excellent tool for reducing costs with minimal impact to $ sales. Done correctly, downsizing can reduce the cost/unit of manufacturing a product while having little to no impact on sales.
The key to downsizing is finding a balance; how much volume can I remove without impacting my sales? Generally, taking up to 5-6% of a downsize doesn’t appear to impact sales at all.
So Why Not Downsize Every Year?
Similar to a price increase, the success of downsizing relies on a change that has a minimal impact to unit sales. With too many downsizes, the change in product size becomes more noticeable to a consumer.
There can also be an issue with creating too much change at a plant level, where making changes every year can greatly disrupt the production cycle.
When is a Downsize Worth Doing?
How long will it take to pay off the changeover costs:
- Listing/nuisance fees
- Liquidated inventory
- Packaging write-offs
- Cost of creating new packaging
- Tooling costs
Generally, the goal is to have a payback period of under 1 year.
The cost of the changeover/downsize savings per unit = # of units needed to sell to break even.
- Will consumers realize the change?
- Timing of the change
- Aim to hit the correct planogram windows
- Managing the changeover efficiently
- Are there packaging requirements that won’t be met?