Product Line Pricing

Since almost every firm has several items in its product line, product line pricing becomes an important  phase of pricing policy. The problem of product line pricing is to find the proper relationship among the  prices of numbers of a product group. Product line pricing may refer to product group. Product line  pricing may refer to products physically the same but sold under different conditions. This gives the seller  an opportunity to charge different prices. Thus use differentials (e.g. hot coffee versus cold/iced coffee),  seasonal differentials (e.g. night fights or night telephone calls), and style cycles differentials are all  phases of product line pricing. The rationale for this heterodox approach to pricing is that the essential  economic features of the product line is the cross-elasticity of demand that exist among parts of the  seller’s output.

General Approach to Product Line Pricing

The underlying principle in product-line pricing is that demand elasticities and competitive situations  rather than cost should form bases for determining the patterns of relative prices of the firm’s products, and the role of cost should be confined to set lower limits for price and to help select the price for the output  combination that is most profitable. But in reality this principle is not widely employed in product-line  pricing. Instead, firms fix prices in such a way that they are proportional to full cost (i.e. that produce the  same percentage net profit margin for all products) or incremental cost (i.e. that produce the same  percentage contribution — margin over incremental costs for all products) or with profit margins that are  proportional to conversion cost. Prices are also set in such a way that type produce contribution margins  that depend upon elasticity of demand of different market segments or that are systematically related to  the stage of market and competitive development of individuals members of the product line.

Demand Relationship in the Product Line

There are two demand relationships that are important in product line pricing. The first is the interdependence of the demand for various members of the product line. This interdependence may result  from their nature as substitute or complementary products. The second demand characteristic is the  importance of the products as instruments for market  segmentation’s  and price discrimination.  Product line pricing has also to take account of competitive differences in respect to the different  products in the line. The number of competitors, the extent of the firm’s market share and the degree of  substitutability of the competitors product are symptoms with which the existing competition can be  measured and the price adjusted accordingly.

The relevant concept of cost applicable in product line pricing is incremental cost. Normally, the  incremental costs of each members of the product line can be compared with its price. The margin  between incremental costs and price will differ greatly from products to product depending on various  conditions. Incremental cost set a floor below which the price should not go normally. Sometimes strategic  considerations warrant the continuance of a product in a line even when its contribution to the profit  margin is below average, such a product may be “loss-limiter” (i.e. it completes a product line by offering  a fall range of  colors   sizes, design etc.) or “price meter” (i.e. its role is to carry out the firms’ policy of  meeting every competitive price with some member of the product line).

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