Economy Pricing Strategy can be defined as a method of pricing which involves a lower price assigned to a product as a result of decreased production costs.
This pricing strategy is adopted by businesses in order to make generic and commodity-related products more consumer-centric in terms of lower prices. The main rationale is to provide customers with a deal and an incentive to make the purchase, considering the lower costs associated with the product.
Therefore, Economy Pricing Strategy can be termed as a volume-based pricing strategy, where the products are priced low, and the organization makes revenue (and subsequently profit) based on the volume of goods that they sell.
Mostly, Economy Pricing Strategy is used for commodity goods, including generic groceries, as well as medications. Mostly, the products that are priced using Economy Pricing Strategy are homogenous.
They are fairly identical goods, and these goods are mostly supplied in a mass market. Therefore, it is used by relatively bigger players in the market, which can afford to work on lower costs, and subsequently higher volumes to generate a greater volume of sales.
How does Economy Pricing work?
The basic rationale of economy pricing lies on the foundations of a cost-plus pricing strategy. This is essential because of the fact that the products that are relevant and pertinent to Economy Pricing are primarily driven by costs. Therefore, the manufacturers need to benchmark prices with the costs too.
Since volume tends to be the most important profit-making agent for the company, it is important for organizations to stay properly up to date with the costs.
The formula that is used by companies in order to calculate the pricing and subsequent profitability of the company is as follows:
Production Cost + Profit Margin = Price
Therefore, with the low price in play, it can be seen that economy pricing mostly constitutes of volume at play. The way in which companies can make a profit primarily depends on the volume of goods that are sold by the company.
From the perspective of the company, it can be seen that economy pricing tends to result in a higher volume of sales, eventually resulting in a higher turnover, and eventually, higher profitability. However, it is important for companies to make sure of the fact that they are fully aware of their costs so that they can make the pricing decisions accordingly.
Industries that use Economy Pricing Strategy
Economy Pricing Strategy is used quite a lot in different areas of businesses. However, it must be noted that this particular pricing strategy might not be well suited to every business model. Examples of companies that mostly use Economy Pricing Strategy is as follows:
- Supermarket store brands
Speaking of supermarket store brands, it is important to consider the fact that supermarkets tend to have their own separate version of different popular brands. They might produce different products under their own brand, in order to create a viable strategy based on which they can push sales.
- Generic Drug and Medications
A lot of pharmaceutical companies rely on economy pricing to engage a more proactive purchasing behavior of customers. It helps them to generate higher sales, and establish greater brand loyalty to the brand.
Airlines are also known to use economy pricing for frequent travelers who move from one destination to the other. This again, helps airlines to retain their customers since they get a higher-value offering as compared to other airline service providers.
Examples of Economy Pricing Strategy
Stuart Inc. produces shampoos that cost around $5 to manufacture. They have a profit margin per unit equivalent to 40%. Their current output is set at 1000 units a month. They then figure out, that if they increase their output to 5000 units a month, the manufacturing cost can do down to $3 per unit, with an equivalent profit margin of 40%.
In the example above, it can be seen that Stuart Inc. has a production cost equivalent to $5 per unit. Their current selling price would be as following:
Selling Price = Manufacturing Cost + Profit Margin = $5 + $2 = $7
If they increase their production to 5000 units, their selling price is equivalent to the following:
Selling Price = Manufacturing Cost + Profit Margin = $3 + $1.2 = $4.2
Subsequently, the impact in profitability can be calculated as follows:
In the current setup, Stuart Inc. will generate a profit equivalent to:
Profit (1000 units) = 2 *1000 = $2000
Profit (5000 units) = 1.2 * 5000 = $6000
Therefore, despite a lower per-unit profit, Stuart Inc. ends up making more profit on the entire consignment.
Advantages of Economy Pricing Strategy
Economy Pricing Strategy has a number of advantages from the perspective of companies. The merits of Economy Pricing Strategy are as follows:
- Economy Pricing Strategy is considered easier to implement as compared to other pricing options. In this regard, it is important to make sure of the fact that companies should ideally have a deeper understanding regarding their prices, so that they can decide the future course of action accordingly.
- Another great advantage of Economy Pricing Strategy is the fact that it keeps the customer acquisition costs relatively low. This has an implication for the company in the sense that it keeps the customer acquisition costs relatively low. This is because customers are driven towards making the purchase, and since it’s priced lower, the customers are prone to making these changes in the said system.
- Goods that are prices using the economy pricing strategy appeal to a wider range of people, essentially because of the fact that they are priced lower, and hence, customers are attracted towards making the purchase.
- Economy Pricing Strategy is used in order to develop a long term valuable relationship with the customer. From a customer’s perspective, economy pricing strategy can help cultivate long term relationship for the companies. Therefore, using this particular pricing strategy helps companies to get a higher customer lifetime value.
- Since economy based pricing relies on volume, it gives the company a chance to avail economies of scale. This can help companies to establish a competitive edge in the market (in terms of lower costs). Additionally, this can also serve the purpose to establish barriers to entry in the market. Hence, this is something that is considered to be highly advantageous, and can help increase market share of the company.
Disadvantages of Economy Pricing Strategy
Regardless of the fact that economy pricing strategy does play to the advantage of both, the customer, as well as the seller, yet there are a couple of disadvantages that need to be considered in this regard. They are the following:
- The margins are lower for companies that are operating economy pricing strategy. This is because they set objectives on selling volumes of goods, as compared to profit.
- Economy Pricing Strategy does not work for all business models and product types. It cannot work on high-end products, and products that involve a fair degree of customization.
- For companies that compete on a product USP (Unique Selling Point), Economy Pricing Strategy might not be a very viable strategy, since product differentiation often gets unnoticed in products that are being sold under economy pricing strategy.
- Since Economy Pricing Strategy is driven by costs, companies need to have a very proactive approach towards their costing, which can ensure that they don’t end up making loss on the products that they sell. In case of any change in costing, organizations might not have enough room to maintain their profitability, and hence, they need to constantly update prices, in case of any fluctuations in costing of the company.