Most products are part of a broader product mix. Within the product mix, which may consist of a large range of different products aiming at a different positioning, they play a specific role. Consequently, they should be priced accordingly. Product Mix Pricing Strategies address this issue. We will explain the basic strategies for setting product prices within the product mix, both for individual products and whole ranges of products in the product mix.
What is Product Mix Pricing?
Before diving into the key product mix pricing strategies, let’s take a minute to review a simple question. What is actually meant by product mix pricing?
Let’s start with an example: You buy a razor. The price is temptingly low, so why not? But once you bought the razor, you quickly notice that the replacement cartridges needed to use it are not that cheap. In fact, when you buy the razor, you are a captive customer for the products the brand makes the real money with – the higher-margin replacement cartridges.
While not every product mix uses such captive pricing strategies, some part of this applies to every product mix. Products that are part of a product mix are all interrelated. How closely these products are related to each other is called consistency. For instance, it is no coincidence that different car models of the same brand may have related names, such as 3 series, 5 series and 7 series. Furthermore, their prices are in conjunction with each other. Obviously, the higher end models are more expensive, but did you know that there is a specific logic behind the exact differences in prices?
Why Product Mix Pricing Strategies are Important
As you can see when looking at different products in the marketplace, prices for products within the same product mix are nearly always related. But why does this happen?
In short, product prices should always be set considering the whole product mix. The reason is that the company should always look for a set of prices that will maximize profits of the total product mix, instead of profits on only one individual product. If the company sets prices for one product only without considering other products in the product mix, it may face a problem: If the product is not priced at exactly the right spot by coincidence, its profit will not be maximized. Even worse, it may hurt the sales of other products in the product mix. For instance, imagine a higher-end car was priced too low. First of all, its own profits would be suboptimal, potentially even negative. But people might even stop buying other models and instead go for the higher-end one since the price difference is too little. This may thus hurt other products in the product mix which may be more profitable.
Since the various products in the product mix have related demand and costs, but face different degrees of competition, pricing is difficult. Therefore, we will have a close look at the five major product mix pricing strategies (or situations) below.
This topic is often neglected by companies. However, it has always been important and potentially becomes ever more important. If we look at the marketplace, we can see that brands are increasingly expanding their product mixes. With growing complexity in the product mix, pricing products correctly gains even more importance.
5 Product Mix Pricing Strategies
Let’s now go into the 5 key product mix pricing strategies (or situations). These pricing strategies should always be considered in addition to regular pricing strategies.
Product Line Pricing
Since firms usually develop product lines rather than single products, product line pricing plays a decisive role in product mix pricing strategies. For example, when you look at a car brand, you will see a relation between the different series and their prices. The entry model obviously costs you less than the top-range car.
These price points are carefully determined. In product line pricing, the firm must determine the price steps between various products in a product line based on cost differences between the products, competitors’ prices, and, most importantly, customer perceptions of the value of different features.
Optional Product Pricing
Optional product pricing is the pricing of optional or accessory products along with a main product. In many cases, you can buy optional or accessory products along with the main product.
For instance, when you order your new car, you may choose to order a navigation system or an advanced Entertainment system. However, for the company, pricing these options is not easy. They must decide carefully which items to include in the base price and which to offer as options.
Captive Product Pricing
We speak of captive product pricing when companies make products that must be used along with the main product. On the contrary, in optional product pricing, we should think of products that can be bought/ sold with the main product.
Examples for captive product pricing are razor blade cartridges and printer cartridges. Captive product pricing is an extremely powerful strategy in the set of product mix pricing strategies. Producers of the main products, e.g. printers and razors, often price them very low and set high mark-ups on the supplies you need in order to operate the main products.
However, companies that use this type of product mix pricing must be very careful. The difficulty is in finding the right balance between the main product and captive product prices. Also, consumers trapped into buying expensive captive products could resent the brand that ensnared them.
By-product pricing refers to setting a price for by-products to make the main product’s price more competitive. It is the result of the fact that producing products and services often generates by-products. Often, these by-products (as singly sold products) would not have any value and getting rid of them is costly. This would then increase the price of the main product. But by using by-product pricing, the company tries to find a market for these by-products to help offset the costs of disposing of them and make the price of the main product more competitive.
In some cases, the by-products themselves can even turn out to be profitable – that is actually turning trash into cash. Sly, isn’t it?
Product Bundle Pricing
The last product mix pricing strategy is product bundle pricing. Using product bundle pricing, companies combine several products and offer the bundle at a reduced price.
A good example is a menu at McDonald’s: you get a bundle consisting of a burger, fries and a soft drink at a reduced price. Also, companies such as Sky, Telecom and other telecommunications companies offer TV, telephone and high-speed internet connections as a bundle at a low combined price. For the company, product bundle pricing is a very effective product mix pricing strategy: it can promote the sales of products consumers might otherwise not buy or buy less. However, the combined price must be low enough to get consumers to buy the bundle instead of a selection of single products.
As you can see, product mix pricing strategies are of critical importance. If a product is priced without considering other products in the product mix, it may hurt profits of both its own sales as well as of other products in the product mix. As you can see, setting prices for a product becomes much more complicated when it is part of a product mix – because all products and their prices are interrelated. With these product mix pricing strategies, you are on the right track.