Price may be defined as the value of product attributes expressed in monetary terms which a consumer pays or is expected to pay in exchange and anticipated of the expected or offered utility. It helps to establish mutually advantageous economic relationship and facilitates the transfer of ownership of goods and services from the company to buyers. The managerial tasks involved in product pricing include establishing the pricing objectives, identifying the price governing factors, ascertaining their relevance and relative importance, determining product value in monetary terms and formulation of price policies and strategies. Thus, pricing plays a far greater role in the marketing-mix of a company and significantly contributes to the effectiveness and success of the marketing strategy and success of the firm.
A business firm will have a number of pricing objectives. Some of the them are primary, some of them are secondary, some of them are long-term while others are short-term. However, all pricing objectives emanate from the corporate and marketing objectives of the firm.
Some of the pricing objectives are discussed below:
- Pricing for a Target Return: This is a common objective found with most of the established business firms. Here, the objective is to earn a certain rate of return on investment (ROI) and the actual price policy is worked out to earn that rate of return. The target is in terms of ‘return of investment’. There are companies which set the target at, for example, 20 percent return on investment after taxes. They target may be for a short-term or a long-term. A firm also may have different targets for its different products but such targets are related to a single overall rate of return target.
- Pricing for Market Penetration: When companies set a relatively ‘low price’ on their new product in initial stages hoping to attract a large number of buyers and win a large market-share it is called penetration pricing policy. They are more concerned about growth in sales than in profits. Their main aim is capturing and to gain a strong foothold in the market. This object can work in a highly price sensitive market. Is it also done with the presumption that unit cost will decrease when the level of sales reach a certain target. Besides, the lower price may make competitors to stay out. When market share increases considerably, the firm may gradually increase the price.
- Pricing for Market Skimming: Many companies that launch a new product set ‘high prices’ initially to skim the market. They set the highest price they can charge given the comparative benefits of their product and the available substitutes. After the initial sales slow down. They lower the price to attract the next price-sensitive lover of customers.
- Discriminatory Pricing: Some companies may follow a differential or a discriminatory pricing policy-charging different prices for different customers or allowing different discounts to different buyers. Discrimination may be practices on the basis of product or place or time for example, doctors may charge different fees for different patients, railways charge different fares for usual passengers and season ticket holders. Manufacturers may offer quantity discounts or quote different list prices to bulk-buyers, institutional buyers and small buyers.
- Stabilizing Pricing: The objective of this pricing policy is to prevent frequent fluctuations in pricing and to fix uniform or stable price for a reasonable period. When price is revised, the new price will be allowed to be remain for sufficiently a long period. This pricing policy is adopted, for example, by newspapers and magazines.
- Competitor-Oriented Pricing: Under this method, pricing is fixed on par with competitor’s pricing policy. If the competitors reduces the prices, the firm will also correspondingly reduce the price. If the competitors increases the price, the firm will also increase the price or keep the price as it is thereby prevent competition.
- Achieving Market Share: A firm may aim to secure a target market share by employing price as an input. Target market share means that share of the industry sale which a firm aspires to attain. It is usually expressed as percentage.
- Profit Maximization Pricing: Profit maximization is the most common pricing objective. It means in a given set of market conditions, firm attempts to maximize profit through the instrument of price.
Besides the above, fast turn around and early cash recover, profit optimization in the long term and target sales volume could also be other pricing objectives.