Product line pricing is oriented on separating goods into cost categories in order to create various quality and feature levels in the minds of consumers. This strategy is typically adopted where you wish to market to different customer types or wish to anchor your products. The goal of product line pricing is to maximize profits. The more features offered, the more consumers will pay. The goal is to draw enough interest in the primary product, to sell the upgraded product at a greater price based on the interest in the basic primary product.
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.
Price bundling is a part of a product line pricing strategy. A firm would typically select a high priced product, and then offer complimentary products at a slightly discounted rate. This strategy is encouraging consumers to buy all the products within the bundle, where they may have only previously bought the single high priced item. The purchase of a new camera is a good example. You typically go into buy the camera, and can often leave with a camera case and extra memory as well!
From the seller's point of view, line pricing holds several benefits:
- It is simpler and more efficient to use relatively fewer prices.
- The product and service mix can then be tailored to select price points.
- It can result in a smaller inventory, and make inventory control simpler.
- It can increase stock turnover.
- As costs change, the prices can remain the same, but the quality in the line can be changed.
However, One of the disadvantages of product line pricing is it's narrow focus on cost alone. As a business model, price lining does not take inflation or consumer purchasing trends into account. A weak economy, a change in purchasing patterns, or additional fluctuations in the market, may cause consumers to lean toward the lower-priced products, thus leaving companies stuck with higher-priced inventory.
One way to get around this challenge, is to further differentiate by using alternative brands. Toyota is company that is famous for producing durable low-price cars. To ensure that sales of their Toyota products are not canabilized and vice versa during down-turns, they have a completely different market offering with their higher end brand, Lexus. Also, they are able to target two customer groups at the same time.
A company's pricing policy sends a message to the market- it gives customers an important sense of a company's philosophy. That is why, a well-chosen price will help to generate optimal revenue and maximizing long term profits. If you think you can provide clear differentiation in the features and benefits of your marketable goods and services, product line pricing could be the way to go.