MARKETING MANAGEMENT - Pricing Objectives and Approaches
Pricing objectives - Pricing Objectives and Approaches
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Just as price is a component of the total marketing mix, pricing objectives also represent components of the organization’s overall objectives.
Pricing objectives
Just as price is a component of the total marketing mix, pricing objectives also represent components of the organization’s overall objectives. The objectives of the firm and its marketing organization guide the development of pricing objectives, which in turn lead to development and implementation of more specific pricing policies and procedures.
For example, a firm might set a major overall objective of becoming the dominant producer in its domestic market. It might then develop a marketing objective of achieving maximum sales penetration in each region, followed by a related pricing objective to set prices at levels that maximize sales. These objectives might lead to adoption of a low-price policy implemented by offering substantial price discounts to channel members.
While pricing objectives vary from firm to firm, they can be classified into four major groups:
(1) Profitability objectives
(2) Volume objectives
(3) Meeting competition objectives, and
(4) Prestige objectives
Profitability objectives include profit maximization and target-return goals. Volume objectives pursue either sales maximization or market-share goals.
Just as price is a component of the total marketing mix, pricing objectives also represent components of the organization’s overall objectives. The objectives of the firm and its marketing organization guide the development of pricing objectives, which in turn lead to development and implementation of more specific pricing policies and procedures.
For example, a firm might set a major overall objective of becoming the dominant producer in its domestic market. It might then develop a marketing objective of achieving maximum sales penetration in each region, followed by a related pricing objective to set prices at levels that maximize sales. These objectives might lead to adoption of a low-price policy implemented by offering substantial price discounts to channel members.
While pricing objectives vary from firm to firm, they can be classified into four major groups:
(1) Profitability objectives
(2) Volume objectives
(3) Meeting competition objectives, and
(4) Prestige objectives
Profitability objectives include profit maximization and target-return goals. Volume objectives pursue either sales maximization or market-share goals.
Profitability objectives:
Classical economic theory bases its conclusions on certain assumptions. It
presumes that firms will behave rationally. Theorists expect that rational
behaviour will result in an effort to maximize gains and minimize losses.
Profits are a function of revenue and expenses.
Profits = Revenue – Expenses
Revenue is determined by the product’s selling price and number of units sold:
Total revenue = Price * Quantity sold
A profit maximizing price, therefore, rises to the point at which further increases will cause disproportionate decreases in the number of units sold. A 10% price increase that results in only an 8% cut in volume will add to the firm’s revenue. However, a 10% price hike that results in an 11% sales decline will reduce revenue. Profit maximization is identified as the point at which the addition to total revenue is just balanced by the increase in total cost.
Consequently, marketers set target return objectives – short-run or long-run goals usually stated as percentages of sales or investments. Target return objectives offer several benefits for marketers in addition to resolving pricing questions. For example, they serve as tools for evaluating performance. They also satisfy desires to generate ‘fair’ profits as judged by management, stockholders and the public.
Many marketers argue that pricing behaviour actually seeks to maximize sales within a given profit constraint. They set a minimum acceptable profit level and then seek to maximize sales in the belief that the increased sales are more important than immediate high profits to the long-run competitive picture. Such a firm continues to expand sales as long as its total profits do not drop below the minimum return acceptable to management.
Another volume-related pricing objective – the market share objective – sets a goal to control a portion of the market for a firm’s good or service. The company’s specific goal may target maintaining its present share of a particular market or increasing its share. Volume-related goals such as sales maximization and market share objectives play important roles in most firms’ pricing decisions.
A third set of pricing objectives seeks simply to meet competitor’s prices. In many lines of business, firms set their own prices to match
Pricing is a highly visible component of a firm’s marketing mix and an easy and effective tool for obtaining a differential advantage over competitors; still other firms can easily duplicate a price reduction themselves.
Because such price changes directly affect overall profitability in an industry, many firms attempt to promote stable prices by meeting competitors’ prices and competing for market share by focusing on product strategies, promotional decisions and distribution – the non-price elements of the marketing mix. When price discounts become normal elements of a competitive marketplace, other marketing mix elements gain importance in purchase decisions.
In such instances, overall product value, not just price, determines product choice. Value pricing emphasizes benefits a product provides in comparison to the price and quality levels of competing offerings. This strategy typically works best for relatively low-priced goods and services. Value-priced products generally cost less than premium brands, but marketers point out that value does not necessarily mean cheap. Value is not just price, but also is linked to the performance and meeting expectations and needs of consumers.
The challenge for those who compete on value is to convince customers that low-priced brands offer quality comparable to that of a higher-priced product.
The final category of pricing objectives, unrelated to either profitability or sales volume, encompasses prestige objectives. Prestige pricing establishes a relatively high price to develop and maintain an image of quality and exclusiveness that appeals to status-conscious consumers. Such objectives reflect marketers’ recognition of the role of price in creating an overall image for the firm and its goods and services.
Profits = Revenue – Expenses
Revenue is determined by the product’s selling price and number of units sold:
Total revenue = Price * Quantity sold
A profit maximizing price, therefore, rises to the point at which further increases will cause disproportionate decreases in the number of units sold. A 10% price increase that results in only an 8% cut in volume will add to the firm’s revenue. However, a 10% price hike that results in an 11% sales decline will reduce revenue. Profit maximization is identified as the point at which the addition to total revenue is just balanced by the increase in total cost.
Consequently, marketers set target return objectives – short-run or long-run goals usually stated as percentages of sales or investments. Target return objectives offer several benefits for marketers in addition to resolving pricing questions. For example, they serve as tools for evaluating performance. They also satisfy desires to generate ‘fair’ profits as judged by management, stockholders and the public.
Volume objectives
Many marketers argue that pricing behaviour actually seeks to maximize sales within a given profit constraint. They set a minimum acceptable profit level and then seek to maximize sales in the belief that the increased sales are more important than immediate high profits to the long-run competitive picture. Such a firm continues to expand sales as long as its total profits do not drop below the minimum return acceptable to management.
Another volume-related pricing objective – the market share objective – sets a goal to control a portion of the market for a firm’s good or service. The company’s specific goal may target maintaining its present share of a particular market or increasing its share. Volume-related goals such as sales maximization and market share objectives play important roles in most firms’ pricing decisions.
Meeting competition objectives
A third set of pricing objectives seeks simply to meet competitor’s prices. In many lines of business, firms set their own prices to match
Pricing is a highly visible component of a firm’s marketing mix and an easy and effective tool for obtaining a differential advantage over competitors; still other firms can easily duplicate a price reduction themselves.
Because such price changes directly affect overall profitability in an industry, many firms attempt to promote stable prices by meeting competitors’ prices and competing for market share by focusing on product strategies, promotional decisions and distribution – the non-price elements of the marketing mix. When price discounts become normal elements of a competitive marketplace, other marketing mix elements gain importance in purchase decisions.
In such instances, overall product value, not just price, determines product choice. Value pricing emphasizes benefits a product provides in comparison to the price and quality levels of competing offerings. This strategy typically works best for relatively low-priced goods and services. Value-priced products generally cost less than premium brands, but marketers point out that value does not necessarily mean cheap. Value is not just price, but also is linked to the performance and meeting expectations and needs of consumers.
The challenge for those who compete on value is to convince customers that low-priced brands offer quality comparable to that of a higher-priced product.
Prestige objectives
The final category of pricing objectives, unrelated to either profitability or sales volume, encompasses prestige objectives. Prestige pricing establishes a relatively high price to develop and maintain an image of quality and exclusiveness that appeals to status-conscious consumers. Such objectives reflect marketers’ recognition of the role of price in creating an overall image for the firm and its goods and services.
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