Often, it becomes necessary to refocus when things have moved far too much in one direction. This short article attempts to do so by pointing out how small changes are capable of making big impact in certain businesses at a time when there is increasing fascination with the grandiose.
EF Schumacher wrote a book, Small is beautiful, that became famous and focused attention on the viability and the necessity of small size undertakings. If anyone is interested in taking a quick look at what he has to say, do check https://centerforneweconomics.org/envision/legacy/ernst-friedrich-schumacher/small-is-beautiful-quotes/.
I have a completely different objective and feel a little guilty in resorting to modifying such a famous title. Other than the fascination with data, our age (if I may be permitted an obviously slippery term) is characterized by an obsession with size and large numbers. In sports, we just quote statistics and equate it with greatness without going into the nuances of the sport. Anyway, this is one of the tragedies of our time when success is equated with greatness. In fact, this obsession has caught on with the NGO and Not for Profit segment too! Everyone wants the big picture because the ‘Big’ attracts attention.
I intend to focus, in this article, on the small changes that count for a lot in many businesses. Let me start with an example from decades ago about a company where postage was a major item of expenses. One of the employees ‘saw’ that with a little modification in size – by a quarter of an inch – most of their packages moved into the lower postage slab, yielding the company £ 350,000 a year in savings! I am sorry I am unable to furnish any link; I read this years ago in The Readers Digest (I think) but I hope you see the point.
Businesses such as telecommunications, fast moving consumer goods need volumes to survive and flourish. It is vital for them to estimate what will be the impact on volume of a small change in price; prices actually since especially FMCGs and now telecoms too sell a wide variety of products, each with different price-demand sensitivities. In telecommunications, for example, measuring time in pulse or seconds became so important as to be a marketing theme. Many mobile phone users will recall the emphasis that telecom companies would lay on the difference between the two. Or how users will react to a bundle of services or offerings for families and so on. In the mid-1990s, commercial banks in India went through the dilemma of finding the right bundle of services, studying, in the process, airlines as they seemed to have the clearest idea of segmenting customers and offering appropriate set of services.
Using the language of economics, what they are trying to measure and evaluate is the price elasticity of demand – how much the demand will change for a change in price. And the change in price would seem small but has the potential to make a big impact on volumes. I remember asking 20 years ago the Marketing head of a telecom company whether they study this elasticity at multiple price points and their impact on volume and his answer was ‘always’. Besides the technical dimensions – network, spectrum, Bandwidth – the telecom business revolves around these seemingly simple decisions but they all focus on increasing the ARPU – average revenue per user.
The FMCG business is no different with one qualification – it is also a business of brands. Effecting minor changes that can have a major impact must be a continual task in such companies, where one of the central influencing factors is the average quantity purchased and the repurchase period (the two are invariably linked). If consumers were accustomed to buying small quantities they may not even notice the ‘real’ difference in price (say per kg) because the price, even with an increase, is affordable at the quantity bought. And that matters to FMCG companies.
You must be familiar with the innovations in packaging – not just in the quality of materials used but also in the size. Sachets became a huge hit because of their convenience but their prices could be disproportionately higher if you worked out the price per kg. However, the consumer is willing to pay that because it doesn’t pinch (at the quantity bought) or not even calculating it and because it is convenient. Smaller houses and smaller kitchens means smaller storage capacity and packaging has to respond because it affects everyday lives: FMCG businesses serve everyday lives. Besides marketing and distribution, FMCG businesses crucially depend on a refined grasp of pricing especially as related to the average quantity purchased and addressing it through packaging.
I am acutely aware that I am making simple, obvious points but at a time when the understanding of businesses is at an elevated level, even grandiose levels, it is necessary to show that small things matter a lot to certain businesses, if not all.
Takeaways
Some businesses depend on small changes to make a big impact
Evaluating sensitivity to prices at multiple points can make a huge difference
Packaging, in the broadest term, is a vital ingredient in this
