Pricing concepts, strategies, and tactics in detail may have to be worked out by the marketer, but in this article we are outlining some basic product-mix pricing issues. Price-setting logic must be modified when the product is part of a product mix. In this case, the firm searches for a set of prices that maximizes profits on the total mix. Pricing is difficult because the various products have demand and cost interrelationships and are subject to different degrees of competition. We can distinguish six situations involving product-mix pricing: product-line pricing, optional-feature pricing, captive-product pricing, two-part pricing, by-product pricing, and product-bundling pricing.
Product-line Pricing: Companies normally develop product lines rather than single products and introduce price steps.
In many lines of trade, sellers use well established price points for the products in their line. A menâ€™s clothing store might carry menâ€™s suits at three price levels: $200, $400, and $600. Customers will associate low, average, and high quality suits with the three price points. The sellerâ€™s task is to establish perceived quality differences that justify the price differences.
Captive-product Pricing: Some products require the use of ancillary or captive products. Manufacturers of razors, digital phones and cameras often price them low and set high markups on razor blades and film, respectively. AT&T may give a cellular phone free if the person commits to buying two years of phone service.
In 1996, Hewlett-Packard (HP) began drastically cutting prices in its printers, by as much as 60% in some cases. HP could afford to make such dramatic cuts because customers typically spend twice as much on replacement ink cartridges, toner, and specialty paper as on the actual printer over the life of the product. As the price of printers dropped, printer sales rose as did the number of aftermarket sales. HP now owns about 40% of the worldwide printer business. Its inkjet supplies carry 35% profit margins and generated $2.2 billion in operating profits in 2002 over 70% of the companyâ€™s total.
There is a danger in pricing the captive product too high in the aftermarket. Caterpillar, for example, makes high profits in the aftermarket by pricing its parts and service high. This practice has given rise to â€œpirates,â€? who counterfeit the parts and sell them to â€œshady treeâ€? mechanics who install them, sometimes without passing on the cost savings to customers. Meanwhile, Caterpillar loses sales.
Two-part Pricing: Service firms often engage in two-part pricing, consisting of fixed fee plus a variable usage fee. Telephone users pay a minimum monthly fee plus charges for calls beyond a certain area. Amusement parks charge an admission fee plus fees for rides over a certain minimum. The service firm faces a problem similar to captive-product pricing namely, how much to charge for the basic service and how much for the variable usage. The fixed fee should be low enough to induce purchase of the service; the profit can then be made on the usage fees.
By-Product: The production of certain goods â€“ meats, petroleum products, and other chemicals â€“ often results in by-products. If the by-products have value to a customer group, they should be priced on their value. Any income earned on the by-products will make it easier for the company to charge a lower price on its main product if competition forces it to do so. Australiaâ€™s CSR was originally named Colonial Sugar Refinery and its early reputation was formed as a sugar company. The company began to sell by-products of its sugar cane; waste sugar cane fiber was used to manufacture wallboard. By the mid 1990s, through product development and acquisition, CSR had become one of the top 10 companies in Australia selling building and construction materials.