PRICE BUNDLING• Price bundling is the tactic of

marketing two or more products and/or services for a price below the sum of the individual prices

• It creates an incentive for purchasers of one product to also buy other(s).

• Examples:– Weekend hotel packages– Vacation packages– Cable TV plans– Season ticket plans

Types Of Price Bundling• Pure bundling

– The products or services are offered only as a bundle.

• Mixed bundling– The products or services can be

purchased singly or as a bundle.– Mixed leader bundling - The price of

the second product is discounted if the first product is purchased at regular price.

– Mixed joint bundling - A single price is formed for the combined set.

Rationale For Price BundlingObjective: stimulate demand to achieve cost economies and

increase profits.• Cost structure

– High ratio of fixed to variable costs.– Shared or common costs for producing or selling multiple

products or services.– Implies that the incremental cost of selling additional products is

relatively low.• Demand

– Demand for the products is interdependent; i.e., the products are complementary.

Principle Of Price Bundling

Different buyers value each product offering differently.

At any specific price, some buyers would be willing to pay more, and some buyers would be willing to spend less.

By packaging products at special prices, the goal is to shift some of the consumers’ surplus for products they would be willing to pay more for to products they would be willing to pay less for.

Developing A Price Bundling Strategy

Four basic steps– 1. Define customer segment targets– 2. Determine bundling objectives– 3. Determine demand conditions for each

objective– 4. Determine profitability of alternative

strategies

Step 1:Define customer segment targets

• Identify the various segments of customers who are targeted to buy the product

• For a two product situation has four basic customer segments– Segment 1: Customers of product A– Segment 2: Customers of product B– Segment 3: Customers of product A &B– Segment 4: Customers who never buy A/B

Step 2: Determine the bundling objectives

• Objective No.1: The firm could target either segment 1 or segment 2.– Cross selling: the attempt to persuade buy

another product on the basis of the product they are currently buying

• Objective No.2: The firm could target customer segment 4, i.e. acquire new customers for A & B

• Objective No.3: The firm could target customer segment 3, Price bundling to retain current customers who buy both A and B

Step 3: Determine demand requirements for each objective

• Identify the relative unbundled demand (sales volume) of each of the products before deciding the strategy

• If the unit sales volume of one of the products is substantially higher than the other, then mixed leader bundling should be used.

• If the unit sales volume of both products are relatively same before bundling, then mixed joint bundling should be used.

Step 4: Determine the profitability of each alternative strategies

• Seller will receive less contribution from sales to profits from customers who previously bought both products.

• If the unit contribution margin of products under bundling are different, then the firm’s profitability will be enhanced only by larger increase in bundled sales comes from those customers who previously purchased lower margin product.

PRODUCT LINE PRICING

PRODUCT LINE

Nature of Decision Problem

• Demand interrelationships– Complementarity – Substitute relationships

• Cost interrelationships – Common resources– Common support structure

• Nature of marketing strategy– Segmentation issues

Types of Pricing Decisions

Determining the lowest priced product and its price (low-end product)

Determining the highest price product and its price (high-end product)

Setting the price differentials for all intermediate products

Determining Price Differentials

1. Rank products in ascending order of expected prices, i.e., from low to high price.

2. Determine the low-end price, Pmin.3. Determine the high-end price, Pmax.

Determining Price Differentials

4. The price of the j th ordered product is

P P k kjj

m in ,1 1

Determining Price Differentials

5. The problem is to determine k:

where n is the number of products in the lineOr

k= (Pmax / Pmin) 1/n-1

log log logm ax m inkn

P P

11

Price Differential Example

• Pmin= $25; Pmax= $150; n = 6

log log log

log . . .

.

k

k

k

15

150 25

152 1761 1 3979 0 1556

1 431

Price Differential Example

• PA =$25

• PB = $25(1.431) = $ 35.78 ($ 36)

• PC = $35.78(1.431) = $ 51.19 ($ 55)

• PD = $51.19(1.431) = $ 73.25 ($ 79)

• PE = $73.25(1.431) = $104.82 ($109)

• PF = $150

Pricing Over the Product Life Cycle

Product Life Cycle• Product Life Cycle (PLC) is the course of a products sales and

profits over its lifetime.• It involves five distinct stages: product development,

introduction, growth, maturity and decline.

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Skimming Price Strategy• Price skimming is a pricing strategy in which a marketer sets a

relatively high price for a product or service at first, then lowers the price over time.

• It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.

When To Use A Skimming Price Strategy

1. Demand is likely to be inelastic during introduction

2. Market can be separated into distinct price segments

3. Skimming is safer when elasticity is unknown (it is easier to reduce price)

4. Cash is needed to fund expansion (caution: sufficient volume must be obtained)

When To Use A Skimming Price Strategy

5. A capacity constraint exists6. There is realistic perceived value in product7. A high introductory price provides room for future price

decreases8. A high introductory price may be used to signal quality9. A high introductory price may be used to signal low

experience effects on costs

Penetration pricing• Penetration pricing is the pricing technique of setting a

relatively low initial entry price, a price that is often lower than the eventual market price.

• Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than short term profit maximization.

When To Use A Penetration Price Strategy

1. Demand is likely to be elastic during introduction2. Product quality and benefits can be easily determined after

trial and use3. Possible economies of scale through accumulated volume4. Product faces strong potential competition soon after

introduction

When To Use A Penetration Price Strategy

5. There is no segment of buyers willing to pay a higher price

6. There is high available capacity in production and distribution

7. A low introductory price may be used to signal large experience effects on costs

Penetration Price Strategy

The advantages of penetration pricing to the firm are: – This can achieve high market penetration rates quickly – This can create valuable word of mouth. – It creates cost control and cost reduction pressures from the start,

leading to greater efficiency – It discourages the entry of competitors

The main disadvantage with penetration pricing is that– It establishes long term price expectations for the product, and image

preconceptions for the brand and company. This makes it difficult to eventually raise prices

Skimming Vs. Penetration• The speed with which a new product loses its uniqueness and

sinks to the level of just another competitive product depends on:– 1. Its total sales potential– 2. The investment required for rivals to manufacture and

distribute the product– 3. The strength of the patent and know-how protection– 4. The alertness and power of competitors

Pricing During Growth• Objective is to select a price that will help generate a sales

volume that enables the firm to realize its target contribution– 3 essential points for pricing during growth:

1. Range of feasible prices has narrowed2. Unit variable costs have decreased due to experience

factor3. Fixed expenses have increased due to increased

capitalization and period marketing costs

Pricing During Growth• Responding to Lower-Priced Competitive Offerings- The firm

should introduce a lower-priced version of the product before competitors enter

• Prolonging the Growth Stage- The firm can revitalize the product with “new and improved” versions

• Pricing Next Generation Products

Pricing During Maturity• Pricing objective is to choose the price alternative leading to

maximum contribution– Follow competition’s reduced prices– Try to reduce costs by using cheaper materials, eliminating

several labor operations, or reducing period marketing costs

Maturity Stage of the PLC

• Modifying the Market: Increase the consumption of the current product.

• How?– Look for new users and market segments– Reposition the brand to appeal to larger or faster-

growing segment– Look for ways to increase usage among present

customers

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Maturity Stage of the PLC

• Modifying the Product: Changing characteristics such as quality, features, or style to attract new users and to inspire more usage.

• How?– Improve durability, reliability, speed, taste– Improve styling and attractiveness– Add new features– Expand usefulness, safety, convenience

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Maturity Stage of the PLC

• Modifying the Marketing Mix: Improving sales by changing one or more marketing mix elements.

• How?– Cut prices– Launch a better ad campaign– Move into larger market channels– Offer new or improved services to buyers

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Pricing A Declining Product

• Pricing objective is to maximize contributions per sales dollar generated– Most firms eliminate all period marketing costs and remain

in the market as long as price exceeds direct variable costs