Optional Price Components

Capsule: The industry may change effective price by including fees, penalties, bonuses or extended payment terms in the product price.

Optional Price Components

  • Fees

  • Penalties/Bonuses

  • Extended Payment Terms

The industry may have increased the number of components making up the price of the product. For example, the Company might see the industry create one or more Optional Components of the price. These Optional Components of the price are in addition to the base price of the product. Every product price has a variable component that defines the basis on which the product sale takes place. The industry may have added price components over and above this variable price to change the net cash equivalent payment the customer makes for the product. These optional price components include Fees, Penalties, Bonuses, or Extended Payment Terms.

These additional components may, and often do, have a different Basis for charging the customer than does the variable component of the price. For example, in the AT&T example below, the variable portion of the price has a charge per minute as its Basis while the optional fee component has a charge per month as its Basis.

Example of Optional Price Components: AAT&T's One-Rate Plus plan offers 10 cents per minute on any long-distance call at any time, plus a $4.95 per month fee that is sometimes waived for two or more months.
AT&T added the Optional Price Component of a fixed fee of $4.95 per month on top of the regular variable price of 10 cents per minute.

For more examples and brainstorming ideas, please see Improve/Pricing/Change Components of Price/Optional Components of Price

Optional Price Components Questions

  • What is the Basis (e.g., measure of weight, package, user, and so forth) on which the product is sold? This is the variable component of the price. Each time this variable Basis increases, the price of the product increases proportionately.

  • Has the industry added an additional Fee on top of the variable charge? This Fee can not exist without the existence of the variable charge. The additional Fee adds to the margin and profitability on the sale. It usually covers a cost that is separable from the cost of the standard product. This Fee often has a separate basis for charge than does the variable cost of the product. For example, a catalog apparel outlet may sell a blouse on a per item variable basis and then charge for shipping either by weight or by a percentage of the purchase.

  • Has the industry added a Penalty or Bonus for the Buyer? This Optional Component of the price charges the customer a Penalty in the event his performance does not reach agreed-upon levels. The Bonus pays the buyer a rebate or gives him an additional discount if his performance exceeds that agreed-upon with the basic product.

  • Has the industry added a Penalty or Bonus that applies to the seller? The Penalty comes into play if the seller fails to reach agreed-upon performance levels. The Bonus would be available to the seller as an additional payment from the customer in the event that the seller exceeds agreed-upon performance levels.

  • Has the industry extended or shortened Payment Terms? The seller may extend the time the customer has to make his full payment for the product. This action reduces effective price. At the opposite extreme, the seller may ask the customer to pay sooner than has been common with the standard product package. This action raises the effective price the customer pays.

  • Have any of these changes in optional price components had an effect on the sales volume of the competitors who introduced the changes?

Basic Strategy Guide Users Go To: Step 23

Summary Points Next: Discounts and Premiums