Latitude of quantity acceptance: Conceptualization and empirical validation

Introduction

As a result of increasing costs, consumer packaged goods companies (i.e., fast moving consumer goods (FMCG) companies) are facing significant pressure on operating margins. For example, the increasing cost of raw material resulted in a steep decline of almost 50 percent in operating profit margins in the second quarter of 2010 for Britannia (Economic Times 2010). Firms have been using innovative strategies to adapt to increasing costs in materials. One such strategy has been to decrease the quantity (weight) of a product packet while keeping the price constant. For instance, Frito lay has reduced the weight per pack by ten to twenty percent; Cadbury has reduced the pack size of Bournville chocolate by seventeen to eighteen percent (DNA Syndication 2011) and ITC has substituted raw material edible oil with butter, reduced the quantity per pack and also hiked the price of high-margin biscuit packs (Economic Times 2010).

In the quantity reduction strategy, it’s the consumer who takes the hit as he is offered a lower quantity of the same product at the same price. The major argument in favor of quantity reduction is that the consumer is less likely to notice it as compared to the price increase. However, such a strategy may be successful in the short term and may be more feasible for brands with high equity as compared to low equity brands, (as found in extant studies level of equity and market share are positive correlated) because the consumer is less likely to switch a brand with a higher loyalty than a brand with lower loyalty (e.g., Fournier 1998). In general, brands with higher equity generate significantly higher customer preferences and purchase intentions (Cobb-Walgren, Ruble, and Donthu 1995). However, there are several practical questions which a marketing manager would have to answer: – for example, what would be the impact of quantity decrease on high equity brands vs low equity brands? How much quantity reduction is possible for a brand under a specific product category? Can low equity brands increase their market share by offering higher product quantity at the same price? Further, in this paper, we attempt to answer these very questions by manipulating product quantity of eight selected brands with different levels of product involvement, brand equity and purchase frequency, asking two specific questions: First, is there a latitude of acceptance with respect to small quantity changes? Second, is there an asymmetric effect of quantity reduction (higher unit price) versus quantity increase (lower unit price)?

Hypotheses

Consistent with the extant literature, we argue that the consumer generally has a reference price for a SKU (stock keeping unit) and this reference tends to be sticky. As discussed earlier, firms consider reducing the product quantity keeping its price unchanged, as one of the options to minimize the adverse impact of higher input cost. Research has shown that consumers have a latitude of indifference around a reference point across many situations/stimuli (e.g. amount of lighting in a room, lifting weights, fluctuations in asset levels, price levels) (Luo 1998; Kardes 2013). Therefore, consumers would be indifferent to this change to an extent, as they are in the case of reference price and other assessments. Evidently, the quantity decrease scenarios are similar to price increases in the sense that they offer lower quantity of a product at the same price, leading to higher per unit price.

We postulate the following three hypotheses with regard to latitude of quantity acceptance and the quantity increase or decrease per unit price.

Hypothesis 1: There exists latitude of quantity acceptance (LQA).

Hypothesis 2: Quantity increase (lower per unit price) will increase consumer purchase intention. Similarly, quantity decrease (higher per unit price) will decrease consumer purchase intention.

Hypothesis 3: The effect of quantity reduction (higher per unit price) will be more for a large market share brand than the effect of quantity increase (lower per unit price) for a small market share brand when the market share differential is large.

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