Ever wonder why the prices of so many products end with “.99”? Most of the time, a bag of chips at the grocery store isn’t $5.00—it’s $4.99. Big difference, right?
A single cent might not seem significant, but research has shown that this tactic (known as “charm pricing”) can actually increase demand for products. It kind of seems like our brains are hard-wired to find good deals.
What does this mean for our ecommerce brands? Well, it means that by thinking of ways to creatively lower the prices of your products, you can put your brand in position to capture more demand and make more sales. The tricky part is setting low prices and still making a profit. That’s where an economy pricing strategy comes in.
What is an economy pricing strategy?
An economy pricing strategy is the tactic of setting prices low to attract budget-conscious shoppers. These prices may be low in relation to competitors or simply as low as possible. Also known as volume-based pricing, economy pricing relies on the economies of scale to generate profit, requiring a greater number of sales to make up for the smaller profit margins on each individual sale.
Because an economy pricing strategy usually sets prices in direct competition with other brands, it is typically considered to be a type of competitive pricing strategy.
Economy pricing shares some similarities with penetration pricing, but the two are distinct strategies that should not be confused. Although both rely on low prices to increase sales, penetration pricing is intended to be a temporary strategy to gain an entry point into the market or increase market share, after which prices will go up. With economy pricing, the low prices are intended to be a long-term strategy for attracting and maintaining customers.
Some brands use an economy pricing strategy for everything they offer, marketing themselves as an economy brand. Others apply economy pricing to certain product lines or specific products, while providing additional offerings at higher price points. For example, Kroger’s store-brand products bearing the Kroger name mostly use an economy pricing strategy. But Kroger also sells store-brand products under different labels, such as Private Selection and Simple Truth, which are never the lowest-priced products on the shelf, and in some cases even utilize a premium pricing strategy.
Pros of economy pricing
A few key advantages to an economy pricing strategy include customer acquisition, low marketing costs, ease of implementation, and brand awareness.
Customer acquisition
People love a good deal. It will never be difficult to find customers who just want the cheapest option available. If you can offer your products for lower than most of the competition, then customer acquisition becomes nearly automatic.
Low marketing costs
When the low cost of your products is their primary selling point, you don’t need to invest nearly as many resources into other marketing efforts. On ecommerce retail sites, your target market will find your products by sorting results to show lowest prices first. And in brick-and-mortar stores, they’ll just compare your prices to those of comparable products next to yours on the shelf. No need to spend a fortune on flashy campaigns to make your products stand out.
Ease of implementation
Using an economy pricing strategy is pretty straightforward. Figure out the lowest prices for which you could sell your products and still make a profit. Determine where your competitors have set their prices. And then set your prices somewhere in that range, preferably just below the prices of your competitors.
Brand awareness
Because economy pricing makes it easy to acquire large numbers of customers, it also makes it easy to gain brand awareness among those customers. And assuming your products are of decent quality, the low prices should make this brand awareness positive.
Walmart has built their brand on an economy pricing strategy. Consumers know they can find many of the same quality products for low prices, and when they just want a product that meets a basic need, they can count on Walmart’s private labels like Great Value to deliver.
(P.S. Want to start earning more sales on Walmart.com? Check out our free guide, How Brands Win on Walmart.com.)
However, using low prices to increase brand awareness can be a double-edged sword. If you reached your low prices by cutting too many corners—and allowing your product quality to suffer—then the brand awareness you receive may earn you a bad reputation.
Cons of economy pricing
Some risks of an economy pricing strategy include product quality, lack of customer loyalty, low profit margins, and heavy competition.
Product quality
Economy-priced products have a reputation for being of poor quality. And sometimes, that reputation is deserved. If you’re going to use an economy pricing strategy, be aware that you may need to overcome the perception that the low prices equal poor quality—and be sure you don’t perpetuate that perception by actually allowing quality to slip.
That said, it’s entirely possible to offer products at economy pricing that defy expectations and offer phenomenal quality. And when you do that, you’re sure to secure a lot of brand loyalty. Trader Joe’s, for example, uses economy pricing while also offering products that are highly sought out for their quality, even apart from the low prices.
Lack of customer loyalty
If you aren’t Trader Joe’s, and you haven’t managed to set your products apart for anything other than your low prices, then your sales will only last for as long as you can keep your prices lower than the competition. If a competitor undersells you, your customers are likely to switch.
Low profit margins
When you set the lowest prices you can offer, it doesn’t leave you with much profit. That’s fine as long as you’re able to sell at a great enough scale to make up the difference. But it gets tricky when you get too much competition. An economy pricing strategy in competitive categories can easily lead to price erosion as you continually lower prices to stay on the bottom.
Heavy competition
Because economy pricing is so easy in theory, you may find that the market is fairly crowded in practice. If you have too many brands vying to offer the lowest prices for the same products, you may reach a point at which you can’t make any profit at all. If that happens, you might need to either switch to a different market, or adjust to a different pricing strategy.
Monitor your prices with Prowl
No matter what pricing strategy you use, it’s important to have and enforce a MAP policy to make sure sellers and retailers stick to the prices you prescribe.
Prowl is the most advanced MAP monitoring software available. It crawls every site your SKUs appear on, comparing prices to your pricing policies. When it detects a pricing policy violation, it takes a screenshot of the violation and notifies you. You can also build and customize templated MAP violation messages to streamline MAP enforcement.
Since Prowl crawls everywhere your products appear, it can track both authorized and unauthorized sellers, helping you find new sellers you’d like to partner with or those you need to eliminate.
MAP enforcement is impossible without price monitoring. And price monitoring is impossible at scale without tools like Prowl. Be equipped to attack while running, and find your way through this challenging economic time with best-in-class MAP monitoring software.
Want to see how Prowl helps protect your revenue?
