Product Mix and Pricing

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A Kahnesky
Manager, Denmark

Product Mix and Pricing

WHAT IS A PRODUCT MIX? MEANING
The Product Mix, also called: "Product Assortment", or: "Product Portfolio" is the complete set of product lines or items (see Product Hierarchy for more information) offered by the seller for sale to the customer.

A company's product mix can be characterized by a number of dimensions:
  • WIDTH: Also called the BREADTH, it refers to the number of product lines offered by the firm. For example, P&G has several product lines such as Baby care, Hair care, Detergents, Oral care, etc.
  • LENGTH: This refers to the total number of items in the firm's product mix. For example, a firm with 4 product lines and 5 products within each line has a product mix length of 20 (i.e. 4 x 5).
  • DEPTH: This refers to the number of items offered by the firm in each product line. For example, under the Detergents product line, P&G offers variants such as Tide (1946), Cheer (1950), Bold (1965), etc.
  • CONSISTENCY: This refers to how closely the product lines are related to each other in terms of consumption, production requirements, distribution channels, etc. The more closely related they are, greater the consistency.

WHAT IS PRODUCT MIX PRICING? INTRODUCTION
Firms need to adjust the stand-alone price-setting logic when a product is part of a product mix. This is because the firm has to identify a price which maximizes the profits it makes on the entire product mix.

USING PRODUCT MIX PRICING. APPLICATIONS
There are at least 6 situations in which Product Mix Pricing is used:
  • PRODUCT LINE PRICING: This is used for pricing the entire product line. Here, the firm introduces Price Steps, in which the price increases from the basic product (the lowest level in the product line), up the product line as we come across products with enhanced features or other differentiators. Here, the firm has to ensure that the perceived quality differences justify the price differences. For example, each phone in Apple's iPhone product line (e.g. iPhone 5, 5S, 6, 6S, and so on) is usually priced higher than the previous variant in order to justify the additional features provided in the latest model. The "old version" is typically lowered in price at the arrival of its successor.
  • OPTIONAL FEATURE PRICING: This is used when the company offers optional products or features along with the main product. These optional features cost extra, over the main product. For example, a motorcycle manufacturer might offer disc brakes, special styling, accessories, etc. at an additional cost, along with the purchase of the motorcycle.
  • CAPTIVE-PRODUCT PRICING: Certain products need the sale of captive products along with them. For example, shaving razors need razor blades, printers need printer cartridges, etc. The rationale behind captive product pricing is that often more money can be made on the sale of the consumables (e.g. the printer cartridge) than on the sale of consumer durables (e.g. the printer). Thus, the firm prices the consumer durable low, while the consumable products are priced higher.
  • TWO-PART PRICING: Certain products or services have two components in their price a fixed component and a variable usage-based component. For example, telecom operators charge a fixed monthly rental in the bill, along with variable cellular (SMS/talk-time) or data (MBs/GBs of data) usage-based charges.
  • BY-PRODUCT PRICING: The production of certain goods results in the creation of by-products. For example, the distillation process of Petroleum results in the production of various chemicals, along with the finished products like kerosene and gasoline/petrol. The manufacturers often don't require the by-product, hence prices it differently vis--vis the main product. Thus, the firm prices the by-product at a lower price in order to get rid of it easily and targets a customer group which requires the by-product.
  • PRODUCT-BUNDLING PRICING: The rationale behind bundling is that a particular customer segment desires one component/product in the bundle, but doesn't resist the other component(s) sold in the bundle. This helps in expanding the market. Thus, multiple products are 'bundled' or clubbed together and sold at a lower price. For example, McDonald's sells fries and beverages along with a burger at a price which is lower than the combined prices of the 3 items. Product bundling pricing is advantageous over offering discounts (refer to Discount Pricing and Promotional Pricing), as it lowers the internal reference price (the amount a customer expects the item to be priced at, based on knowledge of similar products or past experiences) of the customer by a negligible, small value.
Sources:
Kotler, P. & Keller, K. L. (2016) "Marketing Management", 2016, 409-410, 416-418, G8
CFI Education Inc (n.d.) "What is Product Mix?", corporatefinanceinstitute.com
Pahwa, A. (2020) "What is Product Mix? Explanation with Examples", 2020, Feedough
Claessens, M. (2015) "Product Mix Pricing Strategies Pricing the Product Mix", 2015, Marketing Insider
Bhasin, T. (2019) "6 Types of Product Mix Pricing to push products in the market", 2019, Marketing91
P&G India (n.d.) "Brands" Proctor & Gamble India
Dholakia, U. (2015) "What Shoppers should know about Reference Prices", 2015, Psychology Today

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