WHAT ARE THE PRODUCT MIX PRICING STRATEGIES?
CHRISTINE NYANDAT
26 Oct, 2013
Definition: The strategy for product mix pricing strategy is setting a products price often
has to be change when the product is part of a product mix. In the Product Mix Pricing
Strategies case the firm looks for a set of prices that maximizes the profit on the total
product mix
In other words: When it comes to pricing, the most important thing to remember is that
prices must be set in a way that will cover costs and profits. With this in mind, pricing must
be flexible, because prices should always be in line with changing costs, consumer demand,
competitive pricing moves, and profit goals.
Why is it important? Pricing is one of the four main elements of the marketing mix.
Pricing is the only revenue-generating element in the marketing mix (the other three
elements are cost centers—i.e., they add to a company’s cost). Pricing is strongly linked to
the business model. The business model is a conceptual representation of the company’s
revenue streams. Any significant changes in the price will affect the viability of a particular
business model.
A well-chosen price should accomplish three goals:
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achieve the company’s financial goals (i.e., profitability)
fit within the realities of the marketplace (i.e., customers are willing and able to pay the
set price)
support a product’s positioning and be consistent with the other variables in the marketing
mix (i.e., product quality, distribution issues, promotion challenges)
Lecture notes
When a company produces a line of products and/or services, they have what is called a
"product mix." A company's objectives, when setting prices for a product mix, are somewhat
different from setting prices for a single product or service. In pricing for a product mix, the
company is seeking a set of prices that will allow it the most profit potential from selling a
mix of products. There are five basic product-mix pricing strategies, including: Product-line
pricing; optional-product pricing; captive-product pricing; by-product pricing, and productbundle pricing.
Product-Line Pricing
Product quality, real or perceived, is used in product-line pricing. When a company offers a
line of products, product-line pricing is used to separate market offerings by price gaps
between categories. The price gaps are used to alert interested buyers to real or perceived
differences in the quality of offerings. Established price points of competitive offerings are
often used in the setting of different prices for different products in the line. Retailers use
this approach to separate goods into cost categories as well, so that customers can see
distinctions in levels of quality of merchandise.
Optional-Product pricing
This method allows a company to set a low price for its most basic product or service, while
offering desirable/needed add-on accessories or services that are costly. This method allows
the company additional ways to profit. Companies/industries using optional-product pricing
include airlines and cell phone companies. Using optional-product pricing, the company's
challenge is to determine what to include along with the price of its base offer, and what to
present as optional.
Captive-Product pricing
This method is used by companies that market their own supplies for a main product, when
the main product is sold separately. Using this method, the company will usually set prices
low for the main product, but will have high mark-ups on the supplies needed for use it. For
example, makers of computer printers use this method by offering printers at relatively low
Business Administration > Introduction to Marketing > Pricing
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WHAT ARE THE PRODUCT MIX PRICING STRATEGIES?
CHRISTINE NYANDAT
26 Oct, 2013
prices, with printer ink cartridges being offered at substantial prices. Products such as
computer software, staples, and razor blades, also provide good examples of this method.
In the case of services, the captive-pricing method is called two-part pricing. Part one is a
fixed fee for a basic service (for example, a leased automobile, or copier machine). Part two
of the service is a variable usage rate (usage rate, in the example of leased auto, would be
based on mileage; for the leased copier, on the number of copies made). Using this method,
it is up to the service firm to decide what the pricing should be for use of the basic service
and the variable usage rate.
By-Product pricing
Sometimes, the manufacturing process results in production of a useful, and therefore
marketable, by product. When there is a market for the byproduct, by-product pricing is a
method that can allow a manufacturer to obtain a competitive advantage by charging a
lower price for the main product (since making the product produces something else of
value). By-products can be of no, little, or great value. When they are of value, marketers
can accept a price that offers little more than the cost of storing and delivering them, or,
they can have significant value. Some examples of profit-making by-products include, lanolin
(comes from the cleaning of wool); whey (from cheese manufacturing), and asphalt (from
the refining of crude oil).
Product Bundle pricing
This method calls for the "bundling" of several products which are offered for sale as a
combined unit. The price of each item inside the bundle is usually reduced from what the
price would be for the item, if purchased separately. Purchasing the bundled unit allows
buyers to get each item in the bundle at a reduced price. This method allows marketers to
include in a bundle some items that, alone or separately, might not be as popular with
consumers as other items in the bundle. The price must be low enough, however, for the
"package deal" to be attractive to consumers. Cable television,
telephone/telecommunications services companies, and fast-food marketers use bundle
pricing often and effectively.
Business Administration > Introduction to Marketing > Pricing
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