Economy Pricing is the way that the company keeps its product’s selling price very low with minimum margin. They can archive this by decreasing overhead cost, marketing, and advertising expense. The company believes that the lower product price compares to a competitor will increase its sales volume.
Company willing low down their profit margin, but the net profit will not decrease as the selling quantity increase significantly. This strategy popular with commodity goods where they do not need to spend much on advertising expenses. And increasing the selling quantity is not that hard.
Economy Pricing Example
This price strategy mostly works in the grocery industry, where the goods are very similar. The company produces an unnamed brand at a very low price. Generic groceries usually owns by the supermarket, and they can differentiate from other products due to a low price and the absence of a big brand name. They are a small brand which less known to the public due to the saving of advertising expenses.
What are the Advantages of Economy Pricing?
|Economy Pricing Advantages|
|To increase market share||This method will help the company to increase its market share significantly and without any impact to the bottom line. The company still manage to have profit due to the decreasing of overhead cost and marketing expense.|
|Survival technique during the recession||During the economic downturn, most people will try to save money as much as possible. They will less likely care about brand name product as long as it works they will buy. Using this pricing, the company will manage to get some profit while the others are facing loss.|
|To cover the fixed cost||The company will face massive losses if they stop operation, it is mainly the fixed cost which still requires to pay even there is no production. So it is better to produce mass products at a low price just to cover some part of the fixed cost. The company may still be making a loss, however, it is smaller than pausing the operation.|
What are the Disadvantages of Economy Pricing?
|Economy Pricing Disadvantages|
|Low customers loyalty||Without proper marketing and brand, our market share will be quickly taken by the competitor. Our customers will move to the next product on the shelf at a lower price.|
|Hard for small business to expand||The company cannot maintain this strategy when they try to grow their business. It only works well for small businesses. We cannot keep a low price if we sell our product in different markets or regions. The local competitor will find a way to beat us in terms of price very easy.|
|Low product quality||The decrease in overhead costs may lead to an inferior quality product. The company will use low-quality equipment, less experienced staff, which will have an indirect impact on the quality product. It will have a significant effect on the long term due to this low quality.|
|Increase competition||It will encourage the competitors to join the market when they see our success as it is easy to duplicate. Especially the small start-up company that does not have good brand name. They can produce a similar product at a low price and inject it into the market.|
|A high risk||With just a slight margin, this method will put the company into a high risk of failure. If a small thing changes, we will be in serious trouble. The newcomer, social change, consumer behavior, and many other factors can push our company into losing market share. A slightly low margin will hard for the company to stay in the market.|