What is Price Lining?
Price Lining refers to a pricing strategy where the retailer sets defined price points for a common group of products, rather than setting each one at a different price based on cost and markup %.
Price Lining Example
A fashion retailer has purchased different options of denim from different suppliers at various, yet close enough, cost prices.
Supplier A sold him the denim at 5$ per piece
Supplier B sold at 5.1$ per piece
Supplier C sold at 5.2$ per piece
Instead of pricing at a fixed markup of, say 300%, and displaying the product at different prices at the store, the retailer decides to create a price line at 20$
This 20$ price line would mean that the items bought from supplier A would have a markup of 300%, while items bought from supplier B would have a markup of 292% and the ones bought from supplier C would have a markup of 285% (You can use our free markup calculator to perform this calculation).
So the products will have different gross margins, but they will all be grouped under the same price line at the store.
Another price line can then be created for another set of products that have premium quality.
For example, another set of denim can be offered at a 30$ price line and feature higher quality fabrics and be priced at this point regardless of the differences in costs from vendors.
It should be noted that, while setting price lines, there are a lot of factors to be taken into consideration. Read our article on Pricing Considerations for more details.
Why Retailers Use Price Lining
Although the use of price lining could mean having lower margins on some items, retailers usually price their products portfolio collectively, and not by product. This means that lower margins (or even loss) on some products, is calculated and made up for by excess on other products.
Read Also: Loss Leader Pricing
The main reasons retailers prefer price lining include:
Better Visual Display
Products that belong to the same group can be displayed together and have banners in the store communicating the common price line.
Especially when the products have exactly the same specifications but were sourced from different vendors as demonstrated above.
Better Communication & Marketing
When products have set price lines a common marketing campaign can be used to advertise a set of products at the same price, rather than creating different campaigns for each option of the product.
Using the first two tactics will then allow for creating a certain positioning in customers’ minds about the brand and its price levels.
This is especially important in price conscious market segments.
Easier for Buyers
Having set price points for groups of products will make it easier for buyers to identify suitable suppliers.
Since products will not be priced solely based on cost, buyers can quickly calculate if this supplier is offering a price that would be profitable at that particular price line used at the store, and then negotiate from there.
Many times buyers get approached by suppliers that offer great products, but since their own price points will not be suitable for the price line offered at the store they decline to carry their range.
Price Lining for Differentiation
Another way sellers use price lining is by creating different price points for different versions of the same product to appeal to a wide set of customers.
For example, a seller could be offering a product that has a wide range of features. Instead of selling only to customers who can afford the full version of the product and pay the premium price, the seller could create stripped down versions of the product and sell them at lower price lines.
This strategy is used by Apple to capture a wide range of the market, rather than just appeal to premium buyers.
Every time the iPhone is launched, it gets offered at different price points with slight differences at each level. This way, it can get buyers, who would have otherwise avoided the iPhone completely for being expensive, by giving them the basic version, and at the same time still makes more money from customers who can pay premium by giving them a premium version.
Price Lining for Comparison
Sometimes sellers create different price lines for a product deliberately to create their own point of comparison.
For example, if the seller offers only one version of the product at only one price point, the customers will tend to refer to prices from the competition for comparison.
To prevent this from happening, the seller would then create their own comparison by creating different versions with different features and at different price points.
This will again give him the opportunity to appeal to more customers, who would have avoided his product otherwise, and at the same time prevent them from referring to the competition.
It can even drive the sales of the lower priced option by creating a higher price line for a premium option, because then customers compare the lower price to the higher one.
It can also do exactly the opposite, by driving sales of the premium version when customers see that paying the price difference is worth the upgrade.
For example, in the above Apple case, you might see that paying 100$ is worth getting the bigger phone and its premium specs.
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