Page 366 - Marketing Management

SETTING PRODUCT STRATEGY | CHAPTER 12 343

My Little Pony is one of Hasbro’s
core toy brands that receives
special attention and support.

This explains why servers often press hard to get customers to order drinks. Other restaurants price
their liquor low and food high to draw in a drinking crowd.

CAPTIVE-PRODUCT PRICING Some products require the use of ancillary or captive
products. Manufacturers of razors and cameras often price them low and set high markups on
razor blades and film. 42 AT&T may give a cellular phone free if the person commits to buying
two years of phone service. If the captive product is priced too high in the aftermarket,
however, counterfeiting and substitutions can erode sales. Consumers now can buy cartridge
refills for their printers from discount suppliers and save 20 percent to 30 percent off the
manufacturer’s price.

Hewlett-Packard In 1996, Hewlett-Packard (HP) began drastically cutting
Hewlett- Packard prices on its printers, by as much as 60 percent in some cases. HP could afford to make these

cuts because customers typically spend twice as much on replacement ink cartridges, toner, and
specialty paper as on the printer over the life of the product, and inkjet supplies typically carry
45 percent to 60 percent profit margins.As the price of printers dropped, printer sales rose, and
so did aftermarket sales. HP now owns about 46 percent of the worldwide printer business, a share that
accounted for 32 percent of HP’s $13.4 billion profit in 2008. 43

TWO-PART PRICING Service firms engage in two-part pricing, consisting of a fixed fee plus
a variable usage fee. Cell phone users pay a minimum monthly fee plus charges for calls that exceed
their allotted minutes. Amusement parks charge an admission fee plus fees for rides over a certain
minimum. The service firm faces a problem similar to captive-product pricing—namely, how
much to charge for the basic service and how much for the variable usage. The fixed fee should be
low enough to induce purchase; profit can then come from the usage fees.
BY-PRODUCT PRICING The production of certain goods—meats, petroleum products, and
other chemicals—often results in by-products that should be priced on their value. Any income
earned on the by-products will make it easier for the company to charge a lower price on its main
product if competition forces it to do so. Formed in 1855, Australia’s CSR was originally named
Colonial Sugar Refinery and forged its early reputation as a sugar company. The company began to
sell by-products of its sugar cane: waste sugar cane fiber was used to manufacture wallboard. Today,