Service sector

Service-sector shrinkflation has some benefits

Inflation continues to affect consumers’ purchasing power. To make matters worse, companies not only increase prices, but also use “shrinkflation” to reduce the amount of food or product contained in a pre-packaged unit. Whether it’s packets of toilet paper, cartons of juice or tubs of ice cream, consumers have been paying more for less for years.

Clever packaging using opaque portion definitions or packaging labeled as “family-sized” or “enhanced” has created enough “smoke and mirrors” to catch consumers off guard and lull them into a state of appeasement when their purchases. These marketing techniques are the work of consumer magicians, creating the illusion of greater value when fewer products are offered.

What has received less attention is the impact of shrinkage on the service industry.

Consider air travel. The distance between seats on an airplane can be adjusted to make room for more passengers on a flight. This distance, called seat pitch, can be found for every aircraft in an airline’s fleet. By reducing seat pitch by just one inch, an extra row of seats can be added on some aircraft. Widebody aircraft seat widths can also be reduced to add an extra seat in each row. With the obesity epidemic in the United States, this small amount of wasted space can make a two-hour flight much less comfortable for some passengers.

The same principle applies to payment for checked baggage, preferential seats and early boarding. Airlines have created smart ways to increase revenue while keeping ticket prices low. Budget airlines have been particularly adept at doing this, offering deeply discounted ticket prices with many add-ons that improve their bottom line.

The outsourcing of call centers is another example of the contraction of the service sector. Businesses can staff and operate these centers more cheaply, in part due to lower labor and technology costs. Such offshoring is invisible to consumers until they need help with a product. Some argue that the quality of offshore call centers is lower than that of domestic call centers (which studies suggest is consumer preference). So, some companies are rethinking offshore call centers, bringing them back to shore.

In other facets of the service industry, we are also expected to do more and pay more.

Technology has made shrink easier, moving more tasks and activities from the business to the user.

Credit card and bank statements are now offered electronically, rather than being mailed. If hard copies are desired, charges may apply. This is also the case with other recurring monthly bills, such as utilities and cell phones.

This convenience benefits providers, by reducing the cost of processing these documents, but also consumers, who have immediate access to their accounts, less paper clutter, and they can manage all their finances from their smartphone or computer. This is a case where shrinking creates a win-win for everyone.

The only downside to electronic billing and payments is that weekly or monthly subscription fees are billed without any effort. As such, they can fly under the radar unless intentionally stopped. This may include gym fees, newspaper website access fees, or cable TV service fees. The adage “out of sight, out of mind” can lead to additional expenses that are paid for unless a thorough review of bills, charges and statements is made, which many don’t bother to do.

The question that remains is where will the shrinkage stop?

Postal service has already been slowed down with higher postage rates. Will the postal service eventually be reduced to three or four delivery days per week? Will the weight limit for a one-ounce first-class letter be reduced to nine-tenths of an ounce?

Our health care system struggles with higher deductibles and fees paid, with lower levels of service. Your next clinic visit may be unexpected with a health care provider like a nurse practitioner rather than a doctor. The health insurance industry has been able to guide many changes using techniques such as pre-approval requirements, which has resulted in lower costs for them.

Shrinkflation is more than just less product. It’s also less service. No one knows where this spiral of savings will end. What is certain is that it will continue as long as more tasks can be pushed to consumers, with little possibility of recourse.

Sheldon H. Jacobson, Ph.D., is a founding professor of computer science at the University of Illinois at Urbana-Champaign. With a background in probabilistic modeling and data science, he applies his expertise in risk-based and data-driven decision making