The $9.99 Problem: Why Cutting Marketing is the Wrong Answer to Margin Pressure

Consumer brands are running into the same invisible barrier.

As inflation continues to push up the cost of goods sold (COGs), companies have two obvious ways to protect margins: raise prices or cut spending. However, there’s a catch. Consumers don’t respond to prices in a perfectly rational way. Once a product crosses familiar thresholds like $9.99, $19.99 or $49.99, demand can fall disproportionately.

That’s forcing brands to find creative ways to preserve those price points.

You can see it happening across the market. Hasbro is stripping packaging out of its products. Boston Beer shrank from a six-pack to a four-pack. Michaels is redesigning store layouts to highlight products priced under $10. These aren't isolated tactics. They're a coordinated industry response to a hard psychological wall.

When consumers perceive a product as moving into a higher price category, even by a penny, purchasing behavior changes. The difference between $9.99 and $10 isn’t just one cent. It’s a psychological threshold that can reshape demand.

Shrinking package sizes or reducing costs help preserve those critical price points, but it’s a finite strategy. Eventually, brands run out of products to remove or efficiencies to capture.

The Real Impact of Cutting Marketing

Unfortunately, many companies respond by cutting marketing budgets.

On paper, the math appears attractive. Marketing is often one of the largest discretionary expenses on the income statement, making it an obvious target during periods of margin pressure. In practice, it’s one of the most expensive decisions a brand can make.

Based on an analysis we conducted of more than 400 brands and over $42 billion in media spend, brands that cut marketing spending end up paying 3.5 times more in reinvestment just to recapture the demand they surrendered than the savings they generated from the original cuts. That's not a rounding error. That's a multiyear tax on growth to save short-term margin erosion.

The opportunity costs become even greater when competitors continue investing. While some brands retreat, others use the moment to gain share.

Brands generating more than 5 percent year-over-year growth in both sales and net profit value (NPV) consistently devote a larger share of revenue to marketing, roughly 13 percent compared to about 8 percent among slower-growing competitors.

They’re also investing differently.

Winning brands allocate substantially more spend toward media, which is all working ad investments like digital or traditional media. Investments in media are 12.7 percentage points higher than nonwinners, while search is up 10.9 percentage points in terms of share of spending. They’re also shifting away from trade media (e.g., temporary price reductions, BOGO offers), which has a 12.4 percentage point difference from nonwinners. Retail media is another channel preferred by winning brands, as those brands have an 11.1 percent advantage over nonwinning brands in adoption rates.

Rather than treating marketing as a cost center, they invest in channels that generate measurable incremental demand and profitable growth. That investment helps offset margin pressure by growing revenue instead of simply reducing expenses.

Increasing Price Isn’t an Escape Hatch

And increasing the price isn't a clean escape strategy either. Elasticities are real, threshold effects are real, and competitive cross-elasticities are real too. If a brand pushes past a key pricing threshold while competitors hold the line, protecting margin on each unit may simply accelerate market share losses.

That’s why brands need to move beyond reactive cost-cutting and begin modeling the full financial impact of pricing decisions.

Stress testing price moves against elasticity curves and competitive response and pricing thresholds all at once helps brands understand where they truly have pricing power and where maintaining marketing investment will deliver a stronger long-term return.

The brands that win the next 18 months won't be the ones that found the cleverest way to shrink a package. They'll be the ones that understood demand as an asset, modeled the tradeoffs correctly, and protected the marketing investments that sustain profitable growth while competitors focused solely on protecting quarterly margins.

Greg Dolan is CEO of Keen Decision Systems, a marketing mix modeling platform powered by AI.