As we have discussed many times throughout the Principles of Marketing Tutorials, marketers must appeal to the needs of a wide variety of customers. The difference in the “needs-set” between customers often leads marketers to realization that the overall market is really made up of a collection of smaller market segments (see Targeting Markets Tutorial). These segments may seek similar products but with different product features, such as different models whose product components (e.g., different quality of basketball sneakers) or service options (e.g., different hotel room options) will vary between markets.
Price lining or product line pricing is a method that primarily uses price to create a separation between the different models. With this approach, even if customers possess little knowledge about a set of products, they 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 digital cameras), 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 significant price difference. For example, an upgraded model may cost 10 percent more to produce than a base model but using the price lining method the upgraded product price may be 20 percent higher, thereby making it more profitable than the base model. The increase in profitability offered by price lining is one reason marketers introduce multiple models. Offering more than one model allows the company to satisfy the needs of different segments. It also presents an option for a customer to “buy up” to a higher priced and more profitable model.