8.5: Some Other Pricing Schemes
| Customers | Fries | Sandwich | Drink | Total Bundle |
|---|---|---|---|---|
| Customer A | 2.00 | 5.00 | 0.75 | 7.75 |
| Customer B | 2.50 | 3.50 | 1.50 | 7.50 |
| Customer C | 1.75 | 4.25 | 1.00 | 7.00 |
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There are several other pricing schemes that are commonly encountered. Some of these have elements of discrimination. Package pricing , or bundling across products or services, can benefit the seller in some circumstances. Often, goods or services are priced and sold as a take-it-or-leave-it package. Some examples include vacation packages, combo meals, cable TV packages. Table \(\PageIndex{1}\) helps to illustrate why package pricing could makes sense.
| Customers | Fries | Sandwich | Drink | Total Bundle |
|---|---|---|---|---|
| Customer A | 2.00 | 5.00 | 0.75 | 7.75 |
| Customer B | 2.50 | 3.50 | 1.50 | 7.50 |
| Customer C | 1.75 | 4.25 | 1.00 | 7.00 |
Let us consider the case where the firm’s costs are such that it is most profitable to have each customer in the market for each item. In this case, the highest price the firm can charge without bundling is the lowest willingness to pay for each item. Without package pricing, the firm can charge $1.75 for the fries, $3.50 for the sandwich, and $0.75 for the drink. It gets $6.00 in revenue from each customer. By offering take-it-or-leave-it combo packages, the firm can charge $7.00 per package. This represents a nice 16.7 percent increase in revenue per customer.
Contractual tie-in sales are another way to extract additional revenues from high-demand customers when the firm is unable to distinguish between high- and low-demand a priori but plans to enter into a long-term contractual relationship. The logic is that all customers are charged the same entry fee. Once on board, the high-demand customer generates more revenue from tie-in sales. The best example is a franchise. After entering into franchise agreement, the franchisee will normally need to buy inputs from the franchisor. High-demand franchisees, those with good locations and brisk businesses, will therefore generate more revenue for the franchisor than the low-demand franchisees.
Captive product pricing is a similar, related pricing strategy but without contractual obligations (e.g., vacuum cleaner bags, replacement blades for hand razors, printer cartridges). In these cases, the product itself, e.g., the shaving handle or inkjet printer, is priced low and may even be given away. The revenue is made on high-priced sales of replacement components, e.g., razor blades or ink cartridges, which the consumer purchases once he/she becomes captive.