Aside from generating profit, a good pricing strategy also establishes the product’s value and entices customers to purchase.
Product line pricing aims to achieve both results. This strategy groups similar products together and sets price tiers to differentiate quality levels in the minds of customers.
By offering a range of prices, a company can cater to a broader audience and increase sales without additional production and resources investment.
What is product line pricing?
Product line pricing (or price lining) is the process of grouping similar products together and assigning each product a price based on its specific features and quality. These cost categories make it easier to position individual products and distinguish them from other offerings.
Companies use product line pricing to create different value propositions for customers, often using a multi-tier approach that includes high-, mid-, and low-price options.
Product line pricing is actually a marketing strategy instead of a true pricing strategy that looks at various metrics like competitor pricing or cost of goods sold. Instead, price lining focuses on positioning products in customers' minds and highlighting key features and offerings.
What are the benefits of using product line pricing?
Product line pricing is a fairly simple strategy to implement as it doesn’t require any significant investment of resources while still having the potential to increase a company’s sales. Here are some key benefits a company can gain by using product line pricing:
Appeals to more customers from different markets
Rather than selling a single product at a single price point, companies can attract a larger market by creating a cost category with different prices.
Lower prices attract customers who may be price sensitive. On the other hand, higher prices bring in customers in the market for products that offer greater value and quality.
Facilitates the customer buying journey
Customers may be interested in purchasing a product but still currently researching their available options.
By presenting various products and prices, a company can increase the odds of customers staying in their store. All the available information enables customers to learn more about the product themselves, creating a smoother buying journey and allowing the company to control the market’s perception of the product.
Reduces overall marketing and operational costs
With a product line, the products in a category are manufactured and marketed in fundamentally the same way. The whole category is treated as variations of one product, which lessens the need for additional marketing campaigns, product development, and other activities when managing different products. This allows companies to simplify their pricing efforts, save costs, and focus on building a more robust overall brand.
Additionally, product line pricing can streamline procurement management by standardizing purchasing decisions and supplier negotiations across similar products. This reduces complexity and improves cost efficiency, ensuring businesses get the best value from their vendors.
What are the disadvantages of product line pricing?
While product line pricing offers significant benefits, there are also a few considerations to consider. For one, it requires a business to have a product mix of several similar products but with enough feature differentiation to set each one apart from others in the same category.
Creating a product line is also not advisable during recessions or poor economic conditions. Since the strategy relies on customers choosing the mid- or high-price products, there may not be enough profit if the market consistently opts for the low-end offerings.
Even if there is ample purchasing power, it’s up to the company to position its high-end products to highlight their most desirable features and encourage customers to choose the best option.
Three product line pricing strategies (with examples)
Rather than pricing each product separately, product line pricing looks at the entire product group holistically and considers each product’s effect on others in the group. Here are three strategies to choose from:
Captive pricing
Captive pricing works by offering a popular basic product at a low price to attract new customers. However, this base product usually needs additional products, or captive products, to provide the full functionality and value.
While companies might only break even or even lose money on the base product, they make up for the initial transaction with a healthy profit on the add-on products.
A product line pricing example of a brand that employs captive product pricing is beverage company Keurig, with its line of single-serve coffee makers. The base K-Mini product retails for about $80-100, while a pack of 10 K-Cup pods is about $9-10. Each time a customer brews a cup of coffee using their Keurig brewer, they pay almost $1 per serving. This is captive pricing because once a customer buys a Keurig, they are locked in to buying the K-Cups that work with Keurig machines.
Leader pricing
Leader pricing (or loss leader pricing) is when a company sets markedly lower prices for its products, usually with minimal to zero profit margin. Loss leader pricing aims to attract more customers into the store, after which they’ll continue to shop and purchase other higher-margin products.
This strategy is best used for new products or with several complementary products customers are likely to purchase. It’s also effective to clear inventory of dead stock or perishable items.
Grocery stores are one type of retailer that benefit from loss leader pricing. For example, a grocery can attract traffic by offering low-priced staples, such as bread, eggs, or milk. As customers make their way through the store or ecommerce site, they’re likely to add other products to their cart. For example, they may add healthy, organic snacks to go with their staples. These additional items add to the total revenue for the grocery store.
Bundle pricing
With bundle pricing, a company groups multiple related products together as a package deal. The products in the bundle are sold at a lower price than when they are sold separately.
Even with the perceived savings, bundle pricing incentivizes customers to purchase more than they originally planned and effectively increases the entire transaction amount.
Bundle pricing is a prevalent pricing strategy across many industries, especially during holidays and other seasonal sales. For example, say a small business makes personal care products, including bottles of shampoo, conditioner, and body wash it sells for $15 each. It can offer a bundle with all three items for $35, which gives customers a $10 savings and increases overall sales.
How QuickBooks can optimize pricing for your product line
Once a company decides on a pricing strategy, QuickBooks Enterprise offers a number of dedicated features to simplify pricing management and implementation. Enterprise enables companies to set any number of pricing rules, from quantity discounts to scheduled promotions, which are then automatically applied to the correct transaction.
Multiple rules can be applied at once, with a designated start and end date, to reduce the manual mistakes that can occur when processing sales.
Furthermore, companies can also create exclusive pricing rules for specific locations, customer types, or vendors, and manage sales tax by state or city.
Final thoughts
Product line pricing is a customer-centric strategy for companies that want to attract more traffic to their store and increase sales across entire categories. It’s highly effective in expanding the target market and positioning products in a customer’s mind.
With all the examples of product line pricing and an easy pricing solution to simplify implementation, the strategy offers companies several opportunities to increase their market share and bottom line.
