17/06/2013

Pricing Objectives

No comments



Pricing objectives are overall goals that describe what the firm wants to achieve through its pricing objectives. Before setting prices, marketers should always begin by considering objectives, which are overall goals that describe the role of price in an organization’s long-range plans. Because pricing objectives affect decisions in other functional areas such as finance, accounting and production, the objectives must be consistent with marketing and organizational objectives.

Prices are set to meet both short term and long-term goals. Short-term goals relate to survival while long run pricing objectives derive directly from company objectives. They provide guidance to decision makers in determining price policies, formulating pricing strategies and setting actual price. Although the pricing objectives alone are not sufficient to identify the single best list price, they often help managers narrow the range of possible prices.

Most companies have profit as a main pricing objective, other objectives such as market share, competition,
high return on investments etc may be more important to other companies. In another instance, a marketer may use multiple pricing objectives and these include:


Survival


A fundamental pricing is survival. No firm can continue operation without survival. This is why in turbulent times when losses might be recorded in the short run the firm still continues operation. Such difficult times may involve bringing down the price of the product to encourage purchases, giving discounts, or using tie in products.

Organizations will endure short run losses, internal restructuring and other difficulties if they are necessary for survival. Because of the flexible nature of price, it is sometimes used to increase sales volumes to levels that match organization expenses.


Profit


This objective is associated with the objective of the organization. Many organizations have profit maximizations have profit maximization as their objective and this allows the marketer to jerk up the price to exploit the opportunity created by high demand.

It should be noted that the objective of profit maximization is rarely operational because it is difficult to measure its achievement. Hence profit objective tend to be set at levels that the owners and top-level decision makers view as satisfactory. As a result, profit objective may be stated in terms of actual Naira amounts or in terms of percentage change relative to the profits of previous period.


Target Return Investment


This objective is closely related to the profit objective. It involves setting a price with a particular percentage over what is the amount of investment. Pricing with the objective of target return on investment (ROI) involves marketing pricing decisions so that anticipated total sales revenue exceed total costs by enough to provide  the desired rate of return on total investment. For example a firm may set a price that is expected to yield a 25% return on investment.

Most pricing objectives based on return on investment (ROI) are achieved by trial and error because all costs and revenue data required to forecast the return on investment may be available at the time prices are set.


Market Share


Market share pricing is particularly common in large firms within a competitive industry where industry where sales and market share are equated with proof of industry sales. The objective is to maintain or improve market share. It is adopted when:
  • The firm is a leader in the industry.
  • There are strong competitors within the industry.
  • The total sales in the industry are decreasing. 

Status Quo Objective


Status quo objectives are set when an organization is satisfied with its current market position and sales. This occurs in a case where the organization is in a favourable position in the market, and desires nothing more. The objective therefore is to maintain a certain market share, meeting (but not beating) competitors’ prices , achieving price stability, and maintaining a favorable public image. A status quo pricing objective can reduce a firm’s risks by helping to stabilize demand for its products.


Cash-Flow Objectives


When there is a need for an organization to recover cash as fast as possible, pricing objective will be to improve cash flow. This results in bringing down the price. This may however over simplify the value of price in contributing to profit. The objective is also desirable when the life span of a product is expected to be short, there is also desirable when the life span of a product is expected to be short, there is need to increase the price. The disadvantage of such a price increase is that it might allow competitors with low prices to have a field day.


Product Quality Objective


A company with the record of product high quality leadership in the industry will require a high price to cover the high product quality and the high cost of research and development (R&D).


Competition


Meeting or keeping out competitors is an important pricing objective in the following instances:
  • If a company is an industry’s price leader, it may set prices to discourage new competitors from entering the market. 
  •  If a company is a price follower, it sets price to meet competitors’ prices, including those of the price leader.

No comments :

Post a Comment

Use the comment box to make your views, your contribution is kindly appreciated. Urge not to SPAM! Your comment will not be published if noticed as SPAM!! Thanks!!!