Product pricing is a bit different than pricing for services however many of the concepts are the same. As mentioned in Segment Cost Types there are differences in the cost variables. Product pricing has more manufacturing cost types and the time horizon of the product has a longer life span when compared to a service. However, segmenting customer’s needs are equally important and designing different products for different customer segments are absolutely necessary.
There are several terms that need defining with product pricing.
Optional products: As the name states these are optional or accessory products like a TV and a sound bar.
Captive products: Complementary products like a mobile phone and a charging cable.
By-products: Lumber and the by-product is particle board made from the saw dust.
Product bundling: Offering multiple choices for customers such as a large heater for a big room and smaller heaters for smaller rooms.
In my years of working for a major corporation the Finance department was against offering multiple products. They were worried about lost revenue from offering cheaper products, but we argued for weeks that if we didn’t offer different options for our customers then the competition would end up offering those options resulting in lost revenue. Eventually, we won the discussion and created more options for our customers. And the results were quite successful.
So let’s look at laptop computers as an example. Offering the best laptops with the largest amount of memory and powerful CPUs is very appealing but more expensive. Some people do not need all of those options, so offering versions of laptops or desktop computers with less memory and less powerful CPUs provides options to other customers for a cheaper price. And it increases sales to a broader consumer market segment.
However when it came to selling products to businesses we found a different trend. In many companies the Sourcing departments awarded contracts to the suppliers that offered the lowest price models, including desktop computers. The lowest price wins the bid! Like most big corporations there are “preferred supplier lists” provided by the Sourcing department, and the department managers in those companies must choose from those lists when ordering supplies for their staff. Once designated a “preferred supplier” then other models with more expensive options with more memory and faster CPUs for higher prices were also offered. The cheapest version offered was the entry-level option just to win the bid.
After tracking orders it was revealed that most department managers in various companies ordered the most expensive and most powerful laptops that were available. Many staff had VPN access, travelled and often worked from home so purchasing a desktop computer was not even an option. The most powerful laptop computer was their favorite choice.
Regardless of whatever option is most preferred, offering multiple products with different options at different price points will cater to a broader customer base. That will only increase sales and if the products are configurable then that may even result in upgrade options at a later time resulting in more revenue.
Three Tree Solutions 