A business is not set up overnight. It takes a lot of effort, struggles, sleepless nights, sacrificed dinners, and teamwork. After putting a lot of effort into product research, idea generation, execution, and finally launching in the market, the most critical question is pricing strategy.
Pricing strategy is the most critical card of the marketing mix puzzle. However, it doesn’t only relate to the marketing department. The pricing strategy of a company has a direct impact on its accounting, finances, and profitability.
Different pricing strategies bear different fruits. And any business cannot go for a random pricing strategy. Selecting your product’s pricing strategy is highly dependent on your cost accounting, financial management, and budget allocation.
In this article, we will walk through the pricing strategies and, most specifically, economy pricing. This writing piece aims to understand economy pricing, its execution, and what type of businesses can leverage the economy pricing.
Different Pricing Strategies
A price is not the result of the ‘Cost + Certain Percentage’ equation. The pricing strategies are a cumulative product of market positioning, market demand, cost structure, nature of the product, and competition.
A firm use different pricing strategies for choosing the appropriate pricing model for their product.
The pricing strategy mix is an important term in marketing.
There are different pricing strategies as a part of this strategy mix. Let’s go through each of them.
The price skimming strategy is artificially setting the price of a product higher to maximize profit. The skimming strategy is most commonly used in niche positioning when a certain group of people is willing to buy the product at any price.
Most businesses employ price skimming when they have a unique selling point, and they know that soon the market will become saturated as new entrants invade. Therefore, the company offsets its future price drops by charging a high price at present.
Most luxury product selling businesses apply premium pricing. As the name implies, premium pricing is charged for products with higher value or luxury utility.
Most common services and products that employ premium pricing include Five-star and Seven-star Restaurants, Premium Airlines, or any product that make the user feel privileged. Some of the real-life examples of businesses employing premium pricing include Apple, Gucci, Tesla, BMW, etc.
The third pricing strategy used by businesses is penetration pricing. As the name implies, this pricing strategy is mostly used for newly launched products. The firms set a lower-than-value price to make a sound entry into the market.
This pricing strategy is applied to appeal to the customers to try the product. Once the product convinces the customers, it becomes their favorite.
I remember a pizza shop that opened in my hometown a year ago. The price of a regular pizza was half the price of Pizza Hut or Dominos Pizza.
But the taste was not less than those brands. However, the prices have been raised by double in one year because the brand has proven itself and become the choice of customers.
What Is Economy Pricing?
Now let’s understand economy pricing.
The literal definition of economy pricing is,
It is the pricing strategy where product prices are kept low by decreasing production costs.
In economy pricing, most marketing and advertising costs are cut to offer a lower price than the competitors. A firm willingly lowers its price and earns a very minimal margin per product. But the overall profit is not decreased due to high sales volume.
Due to this, economy pricing is often referred to as volume-based pricing.
The most common types of businesses employing this pricing modeling are dealing in generic products like grocery, medications, economic and budget airlines, etc.
How Does It Work?
Let’s go for deeper insights into economy pricing execution and working. The firms and businesses employing this strategy know they won’t make high profits per unit.
A business selling the economy-products keeps the selling volume at the top of anything else. Therefore, they try to bring the product in front of customers at a lower price than competitors.
If we look at the cost accounting perspective of economy pricing, it is a Cost-plus pricing strategy. The products chosen for this model are of lower value and lower production cost. The business launches the products at a small profit per unit.
The formula for the Economy pricing is,
Production Cost + Profit Margin = Price
In the case of this pricing model, only the volume of sales pay. To further understand the working of economy pricing, imagine buying spaghetti instead of Barilla’s spaghetti.
Think of buying the tissue wipes instead of Kleenex or Puffs UltraSoft.
The product is the same in both these examples, but the price difference will be just due to the brand name attached with Barilla, Kleenex, and Puffs.
Common Business Types That Employ Economy Pricing
Which businesses mostly use the economy pricing strategy to gain a competitive advantage of high sales volume?
Let’s look into common business types employing the economy pricing model.
Grocery Stores And Super Markets
Grocery stores and supermarkets are the best illustrations of the economy pricing model. Every grocery store features different brands, and they have their own catalog of famous brands.
However, grocery stores can leverage economic pricing by cutting the promotion, overhead, and marketing costs to offer a lower price than the competitors.
Generic Drugs and Pharmaceuticals
The drugs and pharmaceuticals industry works similarly to the grocery store. Several generic drugs and medications are perfect substitutes for branded medications with the same chemical composition.
The airplane has to incur the same costs as a single flight, whether it’s filled or empty. Therefore, budget airlines use economy pricing to fill the seats and lower the cost per unit.
Big Box Stores
Big box stores are retail stores that occupy a large physical space and offer a wide range of products in multiple niches. The most renowned big box stores are Walmart, Costco, Home Depot, IKEA, etc.
Advantages Of Economy Pricing
Every pricing strategy has certain advantages that make it stand out from others. Here are some of the key advantages economy pricing offers.
Best Technique During Economic Recessions
Economy pricing is the most successful pricing strategy for any business during economic downturns and recessions. When there is an economic recession, people are less conscious of the brand name and more concerned about saving money on every purchase. If a business implements this strategy, it can increase its sales exponentially.
A Strategy To Increase Market Share
Most businesses applying an economy pricing strategy win the competitive edge of providing the same product at a lower price. Therefore, the sales volume and revenues help a business increase its market share in the relevant industry.
Fixed Costs Are Well Covered
It is a good strategy to cover the fixed costs for large business units. If a company facing operational losses shuts down its operations, it is a total failure. However, if they cut some cost and provide the same product at a lower price than market competitors, they can fairly cover the fixed costs.
Disadvantages Of Economy Pricing
There are some downsides of this strategy, which a business must be aware of before putting the strategy into practice.
Customer Loyalty Is A Dream
Most customers looking for the best deals and best prices go for the products with economy pricing. The top priority of such customers is the maximum saving. They won’t bother to switch any brand if they are getting the best price somewhere else. This is one major downside of the economy pricing. Despite large volume sales, the customer loyalty of such businesses is low. To succeed in the long run, you need to have a steady stream of new customers.
Large business units can adopt the economy pricing strategy despite lower profit margins. The reason is that they are well versed in attaining economies of scale and make profits. However, this pricing strategy is a big no for the small businesses trying to leverage this policy. Small businesses looking for scaling opportunities cannot make enough profits by using this policy. All they can earn is restricted profits.
When the businesses see that a large unit is earning a lot of profit and market share by applying economy pricing, they find it easy to replicate the model. As a result, there are a lot of players in the market.
Low Product Quality
When the companies cut their overhead costs, the result is sometimes an inferior product with low value. In the short run, a company might make a lot of profit, but the quality problems might increase in the long run.
High Exposure To Risk
The businesses using economy pricing are operating on very narrow profit margins. A major economic or social event triggering the change in demand, consumer behavior, purchasing patterns, or economic slowdown can lead to a big disaster for the business. Therefore, the economy pricing strategy exposes the business to high risk.
Economy pricing is a great strategy for the necessities and in times of economic downturn. A business should have a very good understanding of the industry-specific operational costs to be able to apply economy pricing. With very thin profit margins, there is less room for making mistakes. Therefore, you must put all the cards in the right spot to complete the profit by economy pricing puzzle.