Pricing objectives and Determinants
1. Profits-related Objectives:
Profit has remained a dominant objective of business activities.
Company’s pricing policies and strategies are aimed at following profits-related objectives:
i. Maximum Current Profit:
One of the objectives of pricing is to maximize current profits. This objective is aimed at making as much money as possible. Company tries to set its price in a way that more current profits can be earned. However, company cannot set its price beyond the limit. But, it concentrates on maximum profits.
ii. Target Return on Investment:
Most companies want to earn reasonable rate of return on investment.
Target return may be:
(1) fixed percentage of sales,
(2) Return on investment, or
(3) A fixed rupee amount.
Company sets its pricing policies and strategies in a way that sales revenue ultimately yields average return on total investment. For example, company decides to earn 20% return on total investment of 3 crore rupees. It must set price of product in a way that it can earn 60 lakh rupees.
2. Sales-related Objectives:
The main sales-related objectives of pricing may include:
i. Sales Growth:
Company’s objective is to increase sales volume. It sets its price in such a way that more and more sales can be achieved. It is assumed that sales growth has direct positive impact on the profits. So, pricing decisions are taken in way that sales volume can be raised. Setting price, altering in price, and modifying pricing policies are targeted to improve sales.
ii. Target Market Share:
A company aims its pricing policies at achieving or maintaining the target market share. Pricing decisions are taken in such a manner that enables the company to achieve targeted market share. Market share is a specific volume of sales determined in light of total sales in an industry. For example, company may try to achieve 25% market shares in the relevant industry.
iii. Increase in Market Share:
Sometimes, price and pricing are taken as the tool to increase its market share. When company assumes that its market share is below than expected, it can raise it by appropriate pricing; pricing is aimed at improving market share.
3. Competition-related Objectives:
Competition is a powerful factor affecting marketing performance. Every company tries to react to the competitors by appropriate business strategies.
With reference to price, following competition-related objectives may be priorized:
i. To Face Competition:
Pricing is primarily concerns with facing competition. Today’s market is characterized by the severe competition. Company sets and modifies its pricing policies so as to respond the competitors strongly. Many companies use price as a powerful means to react to level and intensity of competition.
ii. To Keep Competitors Away:
To prevent the entry of competitors can be one of the main objectives of pricing. The phase ‘prevention is better than cure’ is equally applicable here. If competitors are kept away, no need to fight with them. To achieve the objective, a company keeps its price as low as possible to minimize profit attractiveness of products. In some cases, a company reacts offensively to prevent entry of competitors by selling product even at a loss.
iii. To Achieve Quality Leadership by Pricing:
Pricing is also aimed at achieving the quality leadership. The quality leadership is the image in mind of buyers that high price is related to high quality product. In order to create a positive image that company’s product is standard or superior than offered by the close competitors; the company designs its pricing policies accordingly.
iv. To Remove Competitors from the Market:
The pricing policies and practices are directed to remove the competitors away from the market. This can be done by forgoing the current profits – by keeping price as low as possible – in order to maximize the future profits by charging a high price after removing competitors from the market. Price competition can remove weak competitors.
4. Customer-related Objectives:
Customers are in center of every marketing decision.
Company wants to achieve following objectives by the suitable pricing policies and practices:
i. To Win Confidence of Customers:
Customers are the target to serve. Company sets and practices its pricing policies to win the confidence of the target market. Company, by appropriate pricing policies, can establish, maintain or even strengthen the confidence of customers that price charged for the product is reasonable one. Customers are made feel that they are not being cheated.
ii. To Satisfy Customers:
To satisfy customers is the prime objective of the entire range of marketing efforts. And, pricing is no exception. Company sets, adjusts, and readjusts its pricing to satisfy its target customers. In short, a company should design pricing in such a way that results into maximum consumer satisfaction.
5. Other Objectives:
Over and above the objectives discussed so far, there are certain objectives that company wants to achieve by pricing.
They are as under:
i. Market Penetration:
This objective concerns with entering the deep into the market to attract maximum number of customers. This objective calls for charging the lowest possible price to win price-sensitive buyers.
ii. Promoting a New Product:
To promote a new product successfully, the company sets low price for its products in the initial stage to encourage for trial and repeat buying. The sound pricing can help the company introduce a new product successfully.
iii. Maintaining Image and Reputation in the Market:
Company’s effective pricing policies have positive impact on its image and reputation in the market. Company, by charging reasonable price, stabilizing price, or keeping fixed price can create a good image and reputation in the mind of the target customers.
iv. To Skim the Cream from the Market:
This objective concerns with skimming maximum profit in initial stage of product life cycle. Because a product is new, offering new and superior advantages, the company can charge relatively high price. Some segments will buy product even at a premium price.
v. Price Stability:
Company with stable price is ranked high in the market. Company formulates pricing policies and strategies to eliminate seasonal and cyclical fluctuations. Stability in price has a good impression on the buyers. Frequent changes in pricing affect adversely the prestige of company.
vi. Survival and Growth:
Finally, pricing is aimed at survival and growth of company’s business activities and operations. It is a fundamental pricing objective. Pricing policies are set in a way that company’s existence is not threatened.
DETERMINANTS OF PRICING
A competitive pricing strategy, where prices for a product or service are set based primarily on the prices of the competition, is best suited for a price-sensitive and highly competitive market. Whether you use this type of strategy or not, you should always take your competition’s pricing into account when setting your own pricing, unless you hold a monopoly. If consumers perceive your product and your competition’s as having equal value, you could lose out in a big way if your competitor’s price is lower than yours is.
The laws of supply and demand should always come into play when setting your pricing. If a product is in high demand, particularly if demand exceeds supply, then the market can bear a higher price. Conversely, if demand dwindles, consumers will not be willing to pay higher prices. Your pricing should remain relatively stable over time, but you can put promotions in place to discount the price when needed.
Setting your prices without a thorough grasp of your brand objectives can destroy any brand-building efforts. Your price is a part of your brand image. Think about Walmart, which has built its entire brand around low pricing, or Tiffany & Co., whose consumers expect high-end pricing. If your products’ prices are not in line with your brand image, you will most likely confuse consumers instead of convert them.
Cost of Goods Sold
If you want to make a profit on the sale of your products, you must charge a higher price than what it cost you to actually produce and transport them. The cost of goods sold almost always plays an integral role in any pricing strategy. The exception to this is if you are promoting your product as a loss leader. A loss leader is a product that is sold below cost as an incentive for consumers to purchase other products at normal prices. Many mobile carriers, for example, sell cell phones at hugely discounted rates so that consumers will sign on for one of their cell phone service packages.