Pricing Part II: What can we learn from Toblerone?

Toblerone announced this week that they have reduced the size of their chocolate bar sizes. You might have noticed (on every news outlet and all social media platforms) that the reaction to this move has generally not been a good one.  At face value, this seems like a silly move for a successful product, but really it is an attempt by Mondelēz International to retain customers in a world where inflation in cocoa prices means that something had to give. Either they reduced the cost to produce each bar of chocolate, meaning the customer pays the same for less, or they increased the sales price per bar, risking turning some customers away who feel this price is not acceptable to them. A very difficult choice.

The makers of Toblerone are not the only business owners to be making decisions like this, and these decisions have an impact on what the official inflation figures are. Next week, the Bank of England will announce their monthly review of inflation in the UK economy – currently inflation stands at 1%.

Where some of these products have cut their costs in product manufacturing (like Toblerone) rather than increased their sales price, they are not considered in the inflation figure. This means that although the underlying cost of a bar of Toblerone has increased it is not shown in the inflation figure. Therefore, the underlying inflation in the economy could be quite different to what the Bank of England’s figures say.

How does this affect my business?

The Toblerone effect is certainly having an impact on all businesses whether you are conscious of it or not.  One of the key inflation figures that I keep tabs on is wages inflation.  To the majority of small businesses wages are the biggest cost so keeping an eye on this inflation figure is very important for being able to understand the pressures on your (and your competitors) profitability.

According to http://www.tradingeconomics.com and the Office of National Statistics the rate of inflation for average weekly earnings was at 2.3% in August 2016.  This is more than double the Bank of England’s average for the overall economy.  Previous highs for the rate of inflation for wages was 2.5% in June 2016 and 3% in September 2015.

So what does this mean?

It could mean that whilst businesses up and down the country are agreeing to salary increases, this isn’t reflected in consumer buying. You, and many other businesses, like Toblerone, might be suffering. The price of providing your service or product is going up but you feel like a price hike is not going to be palatable to your customers.  Additionally, the headlines of low inflation are also not giving you the confidence to increase your sale prices.

But one day something has to give! Either you dumb down your products or service (such as Toblerone did in reducing the size of a bar of chocolate) or you take the brave move to increase prices.

This is not an easy decision and needs very careful consideration about not just finances but your market position, marketing and many other issues.  Reviewing your prices is part of the Virtual FD service offered to owner-managed businesses unable to afford the cost of a full-time Finance Director.

Read more about the benefits of our Virtual FD service here and get in touch for a more in-depth chat how it can help you.

p.s. Toblerone, if you are reading, I would have paid a little bit more to keep those extra triangles!