Price lining is a process through which marketers set different price points for different products and services within a particular group. This is a tactic to create different perceptions about the product or service with regard to its quality levels through pricing.
The main idea behind price lining is to increase profits– with more features offered to consumers, marketers can create categories of their products or services and charge them accordingly.
Best example out there is of iPhone. Currently Apple offers three latest models, iPhone 8 and 8 plus and its flagship model, iPhone X.
Now each of these phones have something that is different and comes with their own features. The iPhone 8 is the most handy of the all, the iPhone 8 Plus is bigger and comes with the dual camera feature and iPhone X is the anniversary phone and the most unique of them all – offering animojies and the most powerful camera.
Here’s where Apple is using price lining. Each phone is priced according to its features. An iPhone 8 starts from $699 where iPhone 8 Plus starts from $799. The iPhone X starts from $999 since it’s the anniversary phone and has features that are only unique to it.
The idea behind these prices are to create interest among consumers who will notice these gaps between the prices and use them to evaluate the quality of a product. In other words, marketers use price points.
What are price points?
While we have discussed price points in detail, let’s start with the simplest of definition here – price points strategy is basically about creating different prices using variety of features of the product or service that is being sold.
Just like the example we shared with you before, Apple creates different price points for their price lining strategy according to the models that they are offering.
How price lining influences consumers
The main effect of price lining is to offer consumers the freedom of making a choice.
With flexibility to choose what they want according to the new features or better quality available in the market, consumers can easily decide what they want between what is cheapest and the most expensive one.
Some consumers want everything – if a product has a model that comes with every feature that would be the choice these consumers will go for.
While some want to keep things under a budget and will opt for a product that won’t leave a dent on their pocket.
Price points help consumers in making a decision. By having one price point high and others as medium and low, consumers can easily figure out what they can afford and want. But here’s something that you need to consider – a high price point needs to be justified.
Consumers like when they have choices but they also want a reason why some products or services are priced high. What makes these so exclusive or unique that they are priced above average? Marketing plays an important role here to sell not only the product but its expensive price tag.
Now that we have cleared price lining and how it influences consumers, let’s talk about the pros and cons.
Price lining isn’t only offering consumers with choice flexibility. By creating different prices of products and services, companies can earn more profit without further investment. Basically companies don’t need to create new products, they can focus on one which means no manufacturing cost, lower advertising overheads etc.
With price lining, companies can create variety of products from a single brand and earn considerable markup.
Take car manufacturers – they create three models of their cars and set prices according to the features and add-ons consumers can choose from. Car A would come with automatic brake system and Car B would have manual transmission and Car C would have both features. Among these three cars, Car C will be the most expensive.
The biggest drawback of price lining is that it focuses on cost alone. When marketers rely on price lining, they may not think about other factors like inflation or recent purchasing trends among their target audiences.
For instance, if there was a weak economy, chances are the consumers will go towards lower price points. This would mean that the companies would have to consider the unsold high priced products and hold them as inventory – meaning more costs and no profit.
But there is a way companies can circumvent this, by creating alternative brands. Best example that we can use here would be of Toyota that have created variety of low budget cars. But they also have created a high end brand like Lexus which allows them to target two different target audiences at the same time.
There is also risk involved – with price lining, companies need to be careful since they can charge high and low prices but don’t properly advertise the differentiation between the two products or why one is expensive while the other one is cheaper. Consumers don’t like to be kept in dark when it comes to pricing and can skip the brand completely and look towards competitors.