Optional product pricing

From CEOpedia | Management online

The term optional product pricing determines the pricing of accessory or optional products along with the main product. Companies in this type of pricing offer to sell accessory or optional products along with their main products. One of the examples is the Honda Accord buyers have tendered pricing options if they were going to pay by cash. They had a choice to select from one of the following :

  • shift knob and wooden steering wheel,
  • hand free car kit for handy phone,
  • wooden dash panel and
  • wrap around skirt.

This choice was tendered to the buyers if the buyers purchase for that time period a Honda Accord[1].

A similar example is another car buyer who can choose to order Bluetooth wireless communication and a GPS navigation system. Moreover, refrigerators come with optional ice makers. However, when you order a new personal computer, you might select from:

  • software options,
  • decking systems,
  • a bewildering array of hard drives,
  • service plans and carrying cases.

Pricing this choice is a sticky problem. Automobile companies have to decide which items to offer as options and which to contain in the base price. General Motors' normal pricing strategy until recent years was to promote a stripped-down model at a base price to bring people in showrooms and later to devote most space of the showroom to showing option-loaded cars at upper prices. The economy model was devoided of so many conveniences and comforts that most buyers rejected it. Afterward, General Motors and other the United States automakers followed the examples of the German and Japanese companies and contained in the sticker price a lot of useful items previously sold only as options. Therefore, today most advertised prices represent well-equipped cars[2].

Captive product pricing

Captive product pricing is setting a price for products that have to be used along with the main product. Examples of captive products are:

  • video games,
  • printer cartridges and
  • razor blade cartridges.

Producers of the main products (printers, video game consoles, and razors) frequently price them low and set high markups on the supplies. The example is Gillette which sell low-priced razors but otherwise makes money on the replacement cartridges. Companies that use captive product pricing have to be careful because consumers trapped into buying expensive supplies might come to reset the brand that ensnared them[3].

Examples of Optional product pricing

  • Pay in full with cash: This is an optional product pricing option in which customers can pay the full amount for their product up front. This type of pricing allows customers to get the product at a reduced cost and provides them with the opportunity to save money.
  • Pay with monthly installments: This is an optional product pricing option in which customers can pay the full amount for the product over a period of time. This type of pricing allows customers to spread out their payments and can be beneficial if the customer is unable to pay the full amount up front.
  • Pay with a combination of cash and credit: This is an optional product pricing option in which customers can pay the full amount for the product with a combination of cash and credit. This type of pricing allows customers to pay a portion of the amount up front and the remainder over time.
  • Pay with a down payment and monthly installments: This is an optional product pricing option in which customers can pay the full amount for the product with a down payment and monthly installments. This type of pricing allows customers to make a down payment and then pay the remainder over time.
  • Pay with a discounted price: This is an optional product pricing option in which customers can pay a discounted price for the product. This type of pricing allows customers to get the product at a discounted rate and can be beneficial if the customer is unable to pay the full amount up front.
  • Pay with a loyalty program: This is an optional product pricing option in which customers can pay for the product with a loyalty program. This type of pricing allows customers to get the product at a discounted rate if they are a part of the loyalty program.
  • Pay with a bundle: This is an optional product pricing option in which customers can pay for the product with a bundle. This type of pricing allows customers to get the product along with accessories or other related products at a discounted rate.

Advantages of Optional product pricing

Optional product pricing offers several advantages to both customers and businesses. These advantages include:

  • Increased customer satisfaction - Customers are able to choose the pricing option that best suits their needs. This provides them with greater flexibility and choice when purchasing a product, resulting in increased satisfaction.
  • Increased profits - By offering multiple pricing options, businesses can increase their profits by offering more expensive options to those customers who are willing to pay more.
  • Enhanced marketing - Companies can use optional product pricing to create a more attractive offering. For example, they can offer discounts or packages to customers who purchase multiple products. This can help to increase sales and build customer loyalty.
  • Improved customer service - By offering multiple pricing options, businesses can make it easier for customers to find the best deal. This can lead to improved customer service, as customers will feel that they have been given more choices when making a purchase decision.

Limitations of Optional product pricing

Optional product pricing can be a great way to increase profit margins, however, it comes with some limitations. These include:

  • The ability to up-sell customers on additional products and services can result in higher prices for customers. This can lead to customer dissatisfaction and decreased customer loyalty.
  • This type of pricing can also increase complexity for customers, as they have to decide which optional products and services to purchase. This can lead to confusion and frustration, as customers may not understand all of the options or may be overwhelmed by the number of choices.
  • Additionally, offering too many optional products or services can dilute the focus of the main product, making it difficult for customers to identify and remember the core product or service.
  • Finally, offering too many optional products can overwhelm customers, making them less likely to purchase any at all. This can lead to lower sales.

Other approaches related to Optional product pricing

One approach to optional product pricing is to offer product bundles. This involves offering a package of products at a discounted rate, allowing the customer to purchase multiple products at once. Other approaches include:

  • Tiered pricing, which offers different prices based on the quantity of the product purchased;
  • Value-added pricing, which is offering additional services or products along with the main product, usually at no extra cost;
  • Loss-leader pricing, where companies offer a product at a significantly lower price than the market rate to attract customers who will then purchase other products at full price;
  • Price-skimming, which involves setting a high initial price for a product and then reducing the price over time.

In summary, other approaches to optional product pricing include tiered pricing, value-added pricing, loss-leader pricing, and price-skimming. These approaches can be used to attract customers and increase sales.

Footnotes

  1. ↑ (F.C. Young, C.M. Pagoso 2008)
  2. ↑ (P. Kotler, G. Armstrong 2010)
  3. ↑ (G. Armstrong, S. Adam, S. Denize, P. Kotler 2014)


Optional product pricing — recommended articles
Price bundling — Differential pricing — Trade allowance — Skimming pricing strategy — Captive pricing — Coupon book — Prestige products — Customary pricing — Special offering

References

Author: Alicja Ryszka

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