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Pricing Strategies

Product Line Pricing Strategies

Product line pricing strategies focus on pricing products across an entire line, rather than pricing single products. The price on each product in the line is set with that price's impact on the sales and profitability of other items in the line in mind.  The usual pricing objective is to maximize profits across the entire line.  Several product line pricing strategies are commonly employed: captive pricing, leader pricing, bait pricing, price lining, and price bundling.

Captive Pricing

Captive pricing occurs when the basic product is sold at a low price (or given away), but the customer has to buy additional products at regular prices to achieve the benefits of the base product (Thumbnail One). The seller may take a loss on the base product, but makes a substantial profit on the captive product. This strategy works when no alternative sources of supply exist for the captive product, or these sources are inferior in quality and/or higher priced. Examples of captive pricing include:

Leader Pricing

sld00513.jpg (19382 bytes) Primarily a retail pricing strategy, leader pricing is used mainly to generate store traffic. The retailer advertises some key items for sale at “value” prices. Customers are lured into the store to take advantage of these loss leaders and end up buying other items at regular prices. As a result of these extra, often unplanned purchases, the retailer makes a profit on the total basket of items purchased.  Leader pricing has traditionally been used for well-known, national brands for which consumers immediately recognize a “value” price.  Increasingly, however, we see private brands and even commodities (steaks, ground beef, etc.) promoted as loss leaders.

Bait Pricing

sld00514.jpg (16559 bytes)Bait pricing is an unethical (and sometimes illegal) pricing strategy that is still employed by retailers. Using bait pricing, the retailer advertises a low, highly attractive price for a product that is in limited supply or which it does not possess. The idea is to attract customers into the store and then attempt to sell the customer a higher priced, higher margin product. If the product advertised does not exist in stock (e.g. the stripped down version must be specially ordered), the practice is referred to as “bait and switch.” This practice is illegal.

Bundled Pricing

sld00515.jpg (19007 bytes)Bundled pricing is typically employed for products for which multiple options or accessories are available, or for which extra services may exist. Rather than price each separately, all are “packaged” together and priced as one, generally at a discount.  Examples in industrial markets are common. Equipment producers and/or resellers may bundle the basic product with accessories and service contracts. The customer is charged a total price that is less than what the total would be if all items were purchased separately. Examples in consumer markets include:

Unbundled Pricing

sld00516.jpg (20430 bytes) The opposite strategy of bundled pricing, each complementary product item is priced and purchased separately. This pricing strategy is preferred by customers who do not want the "bundled package." In reality, most firms offer both bundled and unbundled prices. Generally, the bundled price is accompanied with a substantial discount as an incentive to buy more items at once. It is clearly in the seller's best interests to sell the bundled version, as total sales revenue (and profits) tend to be greater as a result.  But, some customers simply don't want or don't need all the products offered as part of the bundle.

Price Lining

Typically a retail pricing strategy, price lining is the practice of selling a limited number of product lines each of which is priced at a different, distinct price point. Each line sold by the retailer may represent a different level of quality or possess different features. Examples of retailers using pricing lining include:

Price lining makes it easier for retailers to buy merchandise, predict profits, and attract and market to specific segments. Price lining also considerably simplifies consumer decision making. Consumers can pick a specific price point and make their selection from merchandise available at that price. This suggests that target customers employ price as a major decision criterion and conjunctive or lexicographic decision rules may be employed. 

When setting price lines, retailers must consider two things: (1) prices must be far enough apart to induce differences in quality perceptions between lines (2) price points should be further apart at higher prices because it takes more of a change in price at higher levels to induce perceptions of differences. 

Exhibit 1
Kinked Demand Curve 
Associated With 
Price Lining

sld0042.gif (19532 bytes)

Price lining assumes a “kinked demand curve” exists for the product line. For example, in Exhibit 1, consumers are very sensitive to prices between $18 and $19. A price of $19 is perceived to be much higher than $18, but a price of $15 is not perceived to be that different from $18 (based on changes in demand). This suggests a price point of $18 is about right for this product line.  Demand becomes very elastic again between prices of $15 and $14. But prices of $14 and $11seem to generate no differences in demand. Thus, the next implied price is $14.

Page last modified: January 19, 2001