As we have discussed many times throughout the Principles of Marketing Tutorials, marketers must appeal to the needs of a wide variety of customers (see the Targeting Markets Tutorial for more details). The difference in the “needs-set” between customers often leads marketers to realization that the overall market is really made up of a collection smaller market segments. These segments may seek similar products but with different sets of product features, which are presented in the form of different models (e.g., different quality of basketball sneakers) or service options (e.g., different hotel room options).
Price lining or product line pricing is a method that primarily uses price to create the separation between the different models. With this approach, even if customers possess little knowledge about a set of products, customers may perceive they are different based on price alone. The key is whether the prices for all products in the group are perceived as representing distinct price points (i.e., enough separation between each). For instance, a marketer may sell a base model, an upgraded model and a deluxe model each at a different price. If the differences in features for each model is not readily apparent to a customer, such as differences that are inside the product and not easily viewed (e.g., difference between laptop computers), then price lining will help the customer recognize that differences do exist as long as the prices are noticeably different.
Price lining can also be effective as a method for increasing profitability. In many cases the cost to the marketer for adding different features to create different models or service options does not alone justify a big price difference. For instance, an upgraded model may cost 10% more to produce than a base model but using the price lining method the upgraded product price may be 20% higher and thus more profitable than the base model. The increase in profitability offered by price lining is one reason marketers introduce multiple models, since it allows the company to not only satisfy the needs of different segments but also presents an option for a customer to “buy up” to a higher priced and more profitable model.