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).