Pricing objectives are the goals that
guide an organisation in setting the cost of a product or service to existing
or potential consumers. A pricing objective underpins the pricing process for a
product. It should reflect the organisation's marketing, financial, strategic
and product goals, consumer price expectations, and the available stock and
production resources. Some examples of pricing objectives include:
- Maximising profits.
- Increasing sales volume.
- Matching competitors' prices.
- Deterring competitors.
- Survival.
Each pricing objective requires a
different price-setting strategy to successfully achieve an organisation’s
pricing goals. The organisation must understand its product attributes and the
market in which the products sell. The choice of a pricing objective can last
for a while. Adjusting a pricing objective may become necessary or appropriate
as business and market conditions change.
Pricing objectives are selected with
business and financial goals in mind. Elements of the business plan can guide
the choice of a pricing objective and the strategies that accompany it. Given
due consideration to an organisation’s mission statement and plans for the
future, if one of the overall business goals is to become the market leader, an
organisation needs to consider the quantity maximisation pricing objective
instead of survival pricing.
If an organisation’s mission is to be a
leader in their industry, it should consider a quality leadership pricing
objective. On the other hand, profit margin maximisation may be most
appropriate if an organisational plan calls for production growth in the short
term, since it will need funding for the relevant facilities and labour.
Some objectives, such as survival and
price stability, will be used when market conditions are poor or shaky, when
first entering a market, or when an organisation is experiencing hard times and
needs to restructure. Examples to consider include:
- Pricing For Profit: This objective aims to make as
much money as possible and maximise price for long-term profitability.
Price has both a direct and an indirect effect on profits. The direct
impact relates to whether the price covers the cost of producing the
product. Price also affects profit indirectly by influencing how many
units might be sold. The number of products and services sold also influences
profit through economies of scale, i.e., the relative benefit of selling
more units.
- Profit Margin Maximisation: This objective seeks to maximise
a product's per-unit profit margin. It is typically applied when the total
number of units sold is expected to be at the low end of the spectrum.
- Profit Maximisation: Seeks to earn the greatest
financial amount in profits. This objective is not necessarily tied to the
aim of profit margin maximisation.
- Sales-Related Objectives: Sales-oriented pricing objectives
seek to increase volume or market share. A volume increase is measured
against an organisation's sales across specific periods.
An organisation's market share measures
its sales against competitors' sales in the industry. Volume and market share
are independent, as a change in one doesn't necessarily activate a change in
the other. The main sales-related pricing objectives include the following:
- Sales Growth: It is assumed that sales growth directly
impacts profits, so pricing decisions are taken to raise sales volumes,
and setting a price and altering or modifying policies are targeted to
improve sales.
- Targeting Market Share: Pricing decisions allow an
organisation to achieve a targeted market share, defined as a specific
volume of sales determined in the light of total sales in an industry. For
example, an organisation may try to achieve a 25% market share in its
relevant industry.
- Increase in Market Share: Price and pricing are sometimes
used as tools to increase market share. When a market share falls lower
than expected, appropriate pricing can raise it. Pricing is aimed at
improving market share.
Every organisation tries to react to its
competitors with appropriate business strategies. Concerning the price, they
may wish:
- To Face Up To The Competition: Today’s markets are characterised
by intense competition, and organisations set and modify their pricing
policies to respond to their competitors. Many organisations use price as
a powerful tool to react to the level and strength of competition.
- To Deter Competitors: Preventing competitors' entry can
be one of the main pricing objectives. To achieve this objective, an
organisation keeps its price as low as possible to minimise the profit
attractiveness of products. In some cases, an organisation reacts
offensively to prevent competitors' entry by selling products at a loss.
- Signal Quality: Buyers believe a high price is
related to high quality. To create a quality or positive image in
customers' minds that an organisation’s products are superior to
those offered by close competitors, an organisation will design its prices
accordingly.
- Market Penetration: This objective concerns entering
deep into a market sector to attract the maximum number of customers. It
calls for charging the lowest possible price to win price-sensitive
buyers. A penetration strategy might be right for an organisation if it is
in a position to gain market share rapidly, bring down unit costs, and
purposefully keep prices low to create barriers to entry.
- Skimming: This expression comes from the
farming practice of milking cows, where the cream rises to the top and can be skimmed off. From a business perspective, this pricing
objective is concerned with skimming maximum profit in the initial stage
of a product's life cycle. Because the product is new and offers new and
superior advantages, an organisation can charge a relatively high price
because it caters to customers who are more willing to pay to become early
adopters.
- Stabilising: This objective seeks to keep
product prices in parity with the same or similar products offered by an
organisation’s competitors to maintain and stabilise a profit generated
from a particular product or avoid starting a price war where no one wins.
It is a tactical goal that encourages competition on factors other than
price and focuses on maintaining market share.
- Survival: This is the most fundamental of all
pricing objectives. Pricing is aimed at survival with hope for growth in
the not-too-distant future. An organisation may use a survival-based
pricing objective when it's willing to accept short-term losses for
long-term viability.
It can be difficult to gauge the
effectiveness of pricing strategies and objectives without a clear destination
of where an organisation should be heading. Pricing objectives drive more than
the decision about how much profit should be made and are likely to be
influenced by the goals and motivations of an organisation's brand over time.
A clear idea of what is vital to an
organisation's financial results is essential, as its product and service
pricing needs to reflect these. A definitive pricing objective is required to
establish a goal path towards reaching the desired profitability through lead
pricing or being a value brand.
Pricing objectives are the indices that
need to be set to drive how an organisation sets product or service pricing for
new and existing customers, in the direction provided by the pricing objectives
over time to meet profitability and sales strategic target points.
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