Several large airlines have recently begun to offer customers a lower-priced, basic economy fare option. At first blush, it’s difficult to see how a further degradation of airline service can enhance profits and attract customers. However, as the author reveals, this is actually a powerful pricing strategy. Rafi Mohammed is the founder of Culture of Profit LLC, and author of The 1% Windfall: How Successful Companies Use Profit to Profit and Grow. He can be reached at rafi@cultureofprofit.com. This article originally appeared on the Harvard Business Review (HBR.org).

The Pricing Advisor, March 2017

American Airlines and United Airlines recently joined Delta in offering passengers a lower-priced option to fly: basic economy. Want to save a couple of bucks on your next flight? Consider making a few sacrifices, which vary by carrier, such as paying fees for checked and carry-on luggage, having the airline (instead of you) select your seat, boarding last, or surrendering the opportunity to make flight changes.

On many Delta domestic flights, passengers can now choose from four different fare classes, each with unique amenities: basic economy, main cabin economy, comfort+, and first class.

At first blush, it’s difficult to see how a further degradation of airline service can enhance profits and attract customers. But in fact, rolling out a lower-priced, no-frills version is a powerful strategy that can deliver benefits to both companies and consumers in the following four ways:

Defensive Precision Discounting

A lesson all companies can learn from basic economy is that employing a stripped-down version can combat discount rivals. It’s common for discount upstarts to enter well-established markets. Their value proposition is typically along the lines of, “We don’t have all of the frills of incumbents, but we’ll save you money.” This has been occurring in the airline industry for decades (Southwest was founded in 1967), but the discount segment has increased recently, as Spirit and Frontier have been siphoning price-sensitive customers from established carriers.

To fend off discount rivals, higher-frill companies often cut prices to remain competitive. While this retains price-sensitive customers, the downside is that it extends discounts to those who don’t need them. Losing, say, 15% of your customer base to a discount rival sounds painful, but it’s important to remember that 85% of your customers continued purchasing at full price. These loyalists decided the fewer-frills-for-a-discount trade-off isn’t worth it for them. So, really, only 15%, the “at risk” customers, need discounts.

The beauty of employing a stripped-down version is that it allows budget-conscious customers to raise their hands to credibly say, “Price is important to me.” The reduction of frills serves as a hurdle to screen out the posers (“Sure, I wouldn’t mind a discount”) from the truly price sensitive (“I’m not going to buy unless the price is lowered”). I mean no disrespect to the posers, because I’m one myself. While I love saving money, basic economy’s stipulation of boarding last (“Final call for Zone Z”) is a deal breaker for me.

Offensive Precision Discounting

The aim of discount companies is to both steal customers from incumbents and serve new customers by growing the market. Airlines with rock-bottom prices, for instance, have grown the air travel market by attracting travelers who would not have taken a trip as well as those who would have driven. In a similar fashion, a no-frills discount option by an established carrier cultivates growth by targeting a new price-sensitive market while not cannibalizing profits from existing customers who prefer ample amenities.

What makes a no-frills version so powerful is its versatility. It can be used defensively to retain price-sensitive customers as well as offensively to grow by being more affordable to new patrons. Another key benefit is that no-frills versions often can be turned on and off based on demand. During popular travel periods, for instance, basic economy tickets can be turned off (“sold out,” “not available”) since there’s no need for companies to offer a discount option during those times.

Supporting a Price Increase

Rolling out a price increase is stressful; there’s always concern over potential customer backlash. Offering a stripped-down version reduces this risk in two ways. First, it provides a cheaper alternative for price-sensitive customers to purchase. It’s also more consumer friendly. Providing customers with the choice to pay higher or lower prices is preferable to a “take it or leave it” price hike ultimatum.

Spotlighting Value

Many companies only offer one option — the best — which includes a wide gamut of services or products. Often, so many attributes are packaged with a product that consumers become overwhelmed. As a result, they can’t fully value all of the included benefits, which means companies aren’t able to charge their product’s true worth.

A stripped-down version sets a “base” from which to upsell. The distinctions between versions make it easier for consumers to understand and determine their value of additional attributes. After this scrutiny, they select the option that provides the best value to them. This doesn’t automatically mean the lowest price. Delta reports that roughly half of its customers who look at the restrictions of basic economy opt to pay more.

Both businesses and consumers benefit from a no-frills, lower-priced option. Businesses gain the powerful ability to target discounts to only the price sensitive. Just as important, the options garnered from unbundling a product enable consumers to select the price or product combination that works best for them.