A lot of businesses use product line pricing. If you are entering into the world of business, you will likely need to know what product line pricing is and how it is used. If you are just starting out, you might want to consider an introductory business course so you can get more information. However, if you are simply a consumer, this information can be helpful to you as well.
What is Product Line Pricing? The Five Common Strategies
Whether you realize it or not, you have likely seen an example of product line pricing. It is the process that retailers use to separate goods into various cost categories creating different quality levels in the minds of their customers. Product line pricing is more effective when there are ample price gaps between each category so that the consumer is well informed of the quality differentials. There are five common product line pricing strategies – captive pricing, leader pricing, bait pricing, price lining, and price bundling. There will be examples with each type of strategy.
The idea behind captive pricing is that a company will have a basic product that they sell at a low price or given away for free. However, in order to receive the full benefit of the item they received, they have to buy additional products. The company might lose money on the base product, but they make a fairly good profit on the additional products. Captive pricing works best when there are no other products of similar quality available in the same price range. You can take a business analytics course to help better understand business performance.
- Razor Blades and Razors: Gilette and Schick are a perfect example of captive pricing. These companies usually sell a razor handle with a small number of blade cartridges for a limited price. Once the consumer runs out of blades, they are going to want to buy additional blade cartridges. The blade cartridges are sold bundled for a lot more than the base bundle.
- Cell Phones and Calling Plans: Verizon Wireless, AT&T, and Sprint are three of the top companies that sell cell phones and wireless airtime. Usually, they offer free or discounted cell phones when you sign up for a contracted wireless plan.
The idea behind leader pricing is to generate store traffic. The items used to get customers into the store are known as loss leaders. When customers come into the store to purchase the loss leaders, they usually end up purchasing extra items at full retail price. The retailer makes their profit off of the unplanned purchases bought with the loss leaders. You can learn more about the basics of business, including pricing, with The Business Plan.
- Walmart: Using their “ad match” deal, Walmart gets customers to come into their store to purchase their groceries at discounted prices. When a customer finds a grocery item they need but at full retail price, they are more likely to purchase it even if it could be found in-store elsewhere for less expensive simply because of convenience.
- Cash for Clunkers Car Deals: Some car dealerships will offer “cash for clunkers” deals, where you can get a set amount of money for any car you trade in, even if it is worth a lot less, just to get you to purchase a car from them instead of a competitor.
This type of strategy is usually viewed as unethical and sometimes illegal, but retailers will still use it. It involves advertising something at a very low price to entice a consumer, but the item is usually offered with a limited supply. Sometimes the company does not even actually possess the item. The customer will then come into the store to purchase the advertised item then find the exact item is out of stock. They will then be encouraged to purchase a similar, higher-priced item that is available in store. A process known as “bait and switch,” in which the advertised product usually has to be specially ordered, is often considered illegal.
Bait pricing isn’t always shady or illegal. Just proceed with caution to make sure you’re being fair and honest with your customers.
- New Product Release: Companies will often release an item with a limited quality in order to test supply and demand. A good example of this type of bait pricing is the release of the new gaming consoles. Microsoft released a limited number of XBox One consoles when they first released them. As the demand grew, Microsoft released more and more consoles. Nintendo also used this strategy when the Wii came out many years ago. However, the demand for Wiis was so great, the consoles were frequently out of stock as Nintendo could not meet demand.
- Clearance: When items do not sell at the retailed price, large companies will often set them for lower prices. The idea behind this is to not only remove inventory that is not selling, but the company will still be able to make a small profit on the item.
Price lining is a strategy retailers use when pricing different items at one specific price point. The items are usually at a different level of quality or have different features. This strategy usually makes it easier for a retailer to buy specific products, predict what their profits will be, and market to a certain consumer.
- Dollar Stores: all merchandise is $1. Some dollar stores also offer merchandise that is less than $1.
Another type of price lining involves a line of products released by a company that are all similar in most ways but offer extra features. Each version of the item will have a different price to emphasize the versions. A good example of this would be Apple’s iPads. The basic iPad with wifi and limited storage costs $499. The next iPad is one with 4G and the same limited storage, but it costs somewhere around $150 more. The prices continue to rise as you go down the line of products.
Products that have several different options or accessories available are sold using bundled pricing. Instead of a consumer having to purchase each item separately, the items are packaged together and priced as one item. This is usually at a discount than what it would have been priced at when purchasing each item separately.
- Cars: When you are purchasing a new car, you can get extra features by bundling them with the car when you purchase it instead of purchasing them later. For example, car A has the standard factory features for $15,000. However, car B has the leather interior and an included GPS in the dashboard that you want for $16,000. If you were to purchase car A instead, you would have to go somewhere to get the leather interior specially installed. You find a place that will install it for $1,500. Then to get the GPS put in, you find a place that will do it for $500, or you can purchase a handheld GPS for $200. In the end, car A would cost you $$16,700-$17000 if you were to get the features you wanted at a later date. Car B offers you a savings of $700-$1,000 if you purchase it bundled.
- Cell phones: When visiting a wireless company like Verizon or AT&T, they usually offer you a bundle deal to go with your new phone. The bundle usually include a case, screen protectors, and a car charger. Rather than purchasing each item separately, they will build you a bundle with the case of your choice and give you all three items at a discounted rate.
- Computers: When purchasing a new computer from someplace like Best Buy, they will offer you a bundle deal on accessories similar to the deal cell phone companies offer. Basically, Best Buy offers you a discount if you purchase accessories for your new computer on the same day.
Some retailers will also use a strategy known as unbundled pricing. This is similar to bundled pricing except done in an opposite manner – each item purchased separately will cost less than purchasing a bundle. A good example of unbundled pricing are desktop computers. While you can purchase a desktop computer with bundled hardware, accessories, and software, if you’re interested in specific hardware or software, it could save you money to purchase each price separately. For example, a bundled gaming computer could cost anywhere from $4,000-$12,000. However, a savvy consumer will be able to build their own gaming computer for anywhere from $2,000-$9,000 depending on features wanted versus features bundled.
No matter what type of business you own, make sure you do some testing and analyzing of your pricing to make sure it is working well with your customers.