Most products are part of a broader product mix. Consequently, they must be priced accordingly. Product Mix Pricing Strategies address this issue. We will explain the basic product mix pricing strategies that change a product’s pricing when it is part of a product mix.
Let’s start with an example: You buy a Gillette Fusion razor. The price is temptingly low, so why not? But once you bought the razor, you quickly notice that the replacement cartridges needed 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.
And that counts for every product mix. Products being part of it are all interrelated, their prices being in conjunction with each other. Therefore, the strategy for setting a product’s price often has to be changed when the product is part of a product mix. Then, the company looks for a set of prices that will maximize profits on the total product mix, instead of on the individual product. Since the various products in the 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).
5 Product Mix Pricing Strategies
The 5 product mix pricing strategies (or situations) are depicted in the table below. A detailed explanation of each follows.
Product Line Pricing – Product Mix Pricing Strategies
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 such as Audi, you will see a relation between the different series and their prices. The entry model, the Audi A1, does cost you less than the top-range car A8.
Thus, 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 – Product Mix Pricing Strategies
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 Audi car, you may choose to order a GPS system and 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 – Product Mix Pricing Strategies
We speak of captive product pricing when companies make product 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 – Product Mix Pricing Strategies
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 – Product Mix Pricing Strategies
The last one of the product mix pricing strategies is product bundle pricing. Using product bundle pricing, companies combine several products and offer the bundle at a reduced price. The best example is probably 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 not otherwise buy. However, the combined price must be low enough to get consumers to buy the bundle instead of a selection of single products.
You see that setting the prices for a product becomes harder when it is part of a product mix – because all products and their prices must be interrelated. But with these product mix pricing strategies, you are on the right track.