Companies usually develop product lines rather than single products.  For example, John Deere makes many different types of lawn tractors, from basic models priced in the $1,200 - 1,500 range, to riding mowers and tractors that can cost as much as $5,000.

Each successive product in the line offers more features, and management must decide on the price steps to set,  and product features to offer, between the various products in the line.

Price steps should take into account cost differences between products, customer evaluations of their features and benefits, and competitors' prices.  If the price difference between two successive products is small, buyers will usually "trade up" to the more advanced product.  This will increase company profits if the cost difference between the two products is less than the price difference.

Many companies use optional-product pricing.  For example, a car buyer may choose to order power windows, cruise control, and a radio with a CD player.  Pricing these options can be tricky; the car company has to decide which items to include in the base price, and which to offer as options.

Two-part Pricing:

Examples of captive products are razor blades (which can only be used with a certain handle), camera film (esp. film that is camera-specific, e.g. Polaroid instant-picture film), and computer software.  Producers of the main products (e.g. razors, cameras, and computers) often price them low and set high markups on the captive products.

Thus, Polaroid prices its cameras low because it makes money on the film it sells; Gillette often gives the razor handles away because it makes money on the replacement blades.  Camera makers who do not sell film have to price their main products higher in order to make the same overall profit.

In the case of services, this strategy is called two-part pricing.  The price of the service is broken into a fixed fee and a variable usage fee.  Thus, a telephone company charges a monthly rate -- the fixed fee -- plus charges for calls beyond some minimum number -- the variable usage fee.  Similarly, a health club charges a membership fee -- the fixed fee -- and implements smaller charges (such as for towel service or locker rental) each time the facility is used -- the variable usage fee.

The service firm must decided how much to charge for the basic service and how much for the variable usage.  The fixed amount should be low enough to induce usage of the service, and profit can be made on the variable fees.

In processing meat, lumber, oil, and  other products, there are often by-products.  If the by-products have no value, and/or if getting rid of them   is costly, this will affect the price of the main product.  The manufacturer will seek a market for these by-products and should accept any price that covers the cost of storing and delivering them.  This practice allows the seller to reduce the main product's price to make it more competitive.

By-products can even turn out to be profitable.  Chicken processors sell feathers to mattress and pillow makers; lumber mills sell otherwise worthless bark and sawdust as decorative mulch for home and commercial landscaping.

Theatres and sports teams sell season tickets -- the cost of an individual event in the season ticket bundle is less than the normal cost of a ticket for a single event.  Hotels sell specially priced packages that include room, meals, and entertainment.  Restaurants offer complete dinner menu bundles that are cheaper than selecting the same individual items from the a la carte menu.

Price bundling can promote the sale of products consumers might not otherwise buy, but the combined price must be low enough to get them to buy the bundle.