University:
Stanford University
Course:
ECON 202 | Microeconomics I
Academic year:

2023
Views:

201

Pages:

2
Author:

T. Elton

Optional Extras And Loss Leaders These represent a particular variety of product line pricing, in which the range consists of one or more main products, and a series of related optional products, or optional extras, and buyers are free to choose whether or not they wish to add on to the main product one or more of the ancillaries. There are two approaches to pricing in this context. The supplier could set a relatively low price for the main product and a relatively high one for the optional extras, hoping that sufficient numbers of the main product will be sold to guarantee a satisfactory return from the highly priced extras. This approach will be particularly successful in the case of 'captive' or 'after-market' products, when the manufacturer or supplier obtains a sale on the basis of a low price for the main product, and his profitability stems from the sale of the 'tied' extras; aircraft engines and their spares are a good example, where a highly competitively priced main product wins the order, and it can only be serviced by means of dedicated (and very profitable) spares. Restaurant chains frequently employ a variant of this approach: vouchers offering discounts against meals are issued in the expectation that the reduced contribution will be more than offset by the increased volume and the profit that will accrue from the highly priced drinks that are likely to be consumed during the visit; alternatively, a free bottle of wine might be offered as an inducement to purchase a relatively expensive meal. In the case of 'optional extras' , some might be rather less optional' than others, despite the publicity material. One need only think of certain prestige cars, where the basic model without the (extremely expensive) optional extras is such a spartan vehicle that no potential owner would dream of acquiring it in that state: through skilful marketing, the manufacturer would seem to have his cake and eat it in this rare and extreme example. Obviously, with a low margin/high margin approach to pricing, the supplier must be careful to ensure that he does not find his sales limited to the low margin products; there is an inherent risk that customers will play the market and only buy the 'loss leaders', purchasing the highly profitable complementary products more cheaply elsewhere. The creation of a captive or tied market for the complementary products is one obvious way of avoiding this. The alternative approach to pricing in this situation is to regard both main and subsidiary products as profit earners in their own right.