Marketing

Economy Size

Posted on Updated on

wikimedia-pizza

NPR noticed that larger pizzas are more economical than smaller one. The same can be said for many consumables like ice cream, soap, cereal, milk, flour, meat, toilet paper, etc. The large economy size is a standard fixture on many stores. Costco is famous for large sizes.

But what is the reason for this packaging? Some people point out that this leads to spoilage and waste, or overeating. Others note the irony that those who must need to stretch their budget, can not afford to buy or store this giant packages.

Why do companies continue to market these larger quantities? One possibility is cost saving. Another is that there is a market for bulk purchases. The following argues that neither of these is a satisfactory explanation. A third alternative is suggested.

Cost saving?

In the case of restaurants, cost saving has a basis. Food service costs fall into three categories: facilities, labor, and raw materials. Generally, the smallest category is the food itself. Thus, the profit margin on a larger than average meal is quite high.

Take the example of a pizza. A large pizza requires a minimal addition to the labor and energy budget, and no additional rent or capital. Thus it is very profitable to sell larger pizzas, even if the price per pound or square inch is lower.

The same can not be said for packages purchased in a store. The estimated saving from selling one package in place of two or three is on the order of a few pennies. Not enough to justify the price reduction.

In conclusion, cost saving does not justify the marketing of large sizes.

A market for bulk packaging?

An informal survey suggests that no one really wants to buy in large quantities. I’ve never met someone who likes carrying large, heavy containers of soap, kitty litter, or potatoes. Juggling a package to three-dozen rolls is toilet paper is beyond comical.

Pricing Strategy.

I propose the reason for a large economy size is a market-segmentation pricing strategy.

The basic principle of pricing strategy is to solve two conflicting goals. First, charge as much as the market will allow. Second, not lose customers by charging too much.

The most obvious example is airline pricing. The market is segmented into two general groups. The first is price insensitive; they will pay anything. They are offered the product with the most convenience and service, which incidentally has the highest margin.

The second segment is the price sensitive; they want low prices. They are offered the price with the least convenience and service. This is a lower margin product. This offering is to capture those customers, even though they provide less profit.

Conclusion

Large economy pricing is like discount airline seats. The goal is to discourage those who are willing to pay more from choosing this alternative. If the product seems inconvenient, just recall that is the goal. The large economy sizes are designed to drive those who are not price sensitive to buy the high-margin regular sizes, while still keeping the price sensitive customers.