Objectives of Pricing
Simply defining, pricing is the means of determining an appropriate price (value) for the product. While fixing the product price, a marketer or company should plan what objectives he wants to realize from that pricing.
The company should decide first its pricing objectives before setting up a price for the product. The pricing objective should be explicitly stated because it has a direct effect on the pricing methods and policies.
The major objectives of pricing in marketing are:
- Profit oriented objectives
- Sales oriented objectives
- Status-quo objectives
Describing each pricing objective,
Maybe the first and most focused goal and objective of every business firm are to generate profits. The profit objectives of pricing’s primary goal are to generate more profits than others. Profit objectives can be achieved in two ways:
Achieving Target Return
Achieving target return is when a business firm prices its offerings to realize some rate of return from its investment or sales. Here, a firm sets some percentage markup on its sales or investment by hoping to cover the operating expenses and get the desired rate of return.
A company can set its investment return percentage on the basis of production costs, market practice, and market competition. To earn high targets in the short run some companies set extremely high objectives and in the long run, they focus on moderate objectives.
Achieving a long-run target return on investment is typically selected as an objective by the manufacturer that is a leader in the industry. The company adopts the target return objective mainly for two reasons:
- First, a dominant company can set its pricing objectives more independently of competition than can the smaller follower firms in the industry.
- Secondly, in large multidimensional companies, the target return objective gives management an objective basis for evaluating the performance of the various dimensions.
Firms adopting maximizing profit objectives usually set the price of the products with the view of maximizing profits or making much money as possible whether it is long run or short run. Profit maximization does not mean always charging higher prices for the offerings.
The firm can maximize its profit either from every single item sale is made or from the total output or total sales. The firm should focus on total output to maximize profits rather than a single item sold. If the firm wants to maximize profit in long run it may face losses in the short run. To get such profits it has to offer leader items at affordable prices.
Generally, this profit maximization objective that small businesses adopt. However, to maximize profit the prices should be acceptable to the customers which generates more sales and profit and at the same time satisfies both company and customers.
Pricing sales objectives call for increasing sales as far as possible. Especially big companies focus on this objective to increase their sales volume rather than profit but believe more sales generate profits also.
The sales-oriented objective can be adopted to increase sales volume and increase market share.
Increase Sales Volume
Increasing sales volume objective focuses on increasing a certain percentage of the sales over time. It focuses on increasing sales volume continuously either it is by small (5%), sets prices that promote the sales volume, or even sometimes lowers the price.
Increasing sales volume does not mean ignoring the profit. Rather this objective believes the increased sales volume has a positive impact on profit.
To fulfill this objective sometimes a company may sell its products or services at lowers prices than competitors and sometimes also face losses. However, the company is ready to face short-run losses to gain long-term benefits.
Maintain/Increase Market Share
Pricing also can be used to maintain or increase the market share of the firm. Some companies may willing to maintain their market share as it is or capture new markets to expand their market.
The market share of the firm is a great indicator to the firm as it is successful or not. When the firm has a low market share it can adopt strategical pricing to maintain or improve its shares in the market.
The status-quo objective focuses on maintaining the status or goodwill of the business firm in the market. It is also said as “Don’t-Rock-The-Boat”.
It is the least aggressive objective as compared to other pricing objectives. Especially most large companies adopt this pricing objective to maintain their status or goodwill as it is in the market and to minimize the risk.
Staus quo objective is related to stabilizing prices and meeting competition.
Price stabilization means making stable prices in the market for a certain period of time to earn the trust of the target market. The market is uncertain always, and fluctuates independently – in such a particular situation, some big companies try to maintain stability in their pricing and aim to prevent the market from instability or uncertainty.
This practice helps these companies to build up their status or goodwill in the market. The price leader companies generally play this type of role.
It is obvious that we do not believe those companies as good if they do not provide competitive offers to the consumers. These pricing objectives adopting companies usually price their offerings based on the market scenario.
Thus, it is necessary for the companies to meet the market competition to make stable their status in the market. However, very few companies can successfully adopt and implement this objective because of the very difficult job and for this, the companies need to be competent.