The principle of economy pricing is fairly simple – an economy pricing strategy involves shifting a high volume of the goods being sold for a low price. The aim of the strategy is to ensure a healthy cash flow and reliable income stream by enticing large numbers of customers to make a purchase on the basis of the affordability of the products.
In the wider marketplace, economy pricing tends to be used for generic brand items – such as own brand supermarket goods – rather than name-brand products. One of the reasons for this is that generic products don’t enjoy the kind of marketing and advertising budgets devoted to name-brand products, and so have less spend to recoup before generating any profit.
How to use an economy pricing strategy
In order to implement an economy pricing strategy effectively you need to be certain of two key metrics in relation to the goods in question. These are the production costs for that product and the kind of price which will generate a small profit. You will also need to be certain that the product in question will sell in large enough numbers for the small profit on each individual unit to become a large profit when the sales reach sufficient volume. What this means is that anyone using an economy pricing strategy has to pursue new customers and increased sales rather than relying on existing customers only.
The advantages and disadvantages of economy pricing
As with any pricing strategy, economy pricing comes with pros and cons. It is particularly useful for larger and more established companies able to absorb the drop in income which may initially come with cutting prices on the basis of the higher profits the strategy will generate in the longer run.
The pros of economy pricing
As a strategy it is easy to implement
It’s particularly effective when targeting specific demographics – those looking for a good deal and value for money over attributes such as luxury, quality or exclusivity
It enables a business to acquire large numbers of new customers at greater speed.
The cons of economy pricing
Although the advantages of economy pricing already set out may make it seem like a tempting policy it has to be understood that it only works in specific market conditions. If you have no existing market share, for example, or low customer awareness, then your marketing costs are likely to mount to a degree which renders economy pricing unviable. Other cons include:
A new brand launched with economy pricing may suffer from negative customer perceptions, particularly in terms of the quality being offered
The profit margins are extremely tight, so a consistent supply of new customers is required
Customers driven to your brand primarily by price will be less likely to demonstrate long-term loyalty if a cheaper brand emerges
Having to keep overheads as low as possible may lead to a drop in quality
Working to a tight profit margin means that the risk of dropping into making a loss is greater and could be triggered by relatively small changes in market conditions.
Times when an economy pricing strategy might be suitable
There are specific market conditions under which an economy pricing strategy is most likely to reap dividends. Some of them are as follows:
When you wish to increase your market share at speed
During times of economic downturn such as a recession, when consumers, on the whole, will be looking to spend less money than usual.
We can help
If you’re interested in finding out more about economy pricing and whether you should use it, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.