Different Types of Pricing Objectives

The task of the marketing manager is to decide the objectives of pricing before he determines the price itself. Pricing objectives provide guidance to decision makers in formulating price policies, planning pricing strategies and setting actual prices. The most important objective of the companies is to have maximum profits.

Pricing objectives are goals that describe what a firm wants to achieve through pricing. Pricing objectives must be stated explicitly, and the statement should include the time frame for accomplishing them. There are six stages of setting prices. They are developing pricing objective, assessing the target market’s evaluation of price, evaluating competitors’ prices, choosing a basis for pricing, selecting a pricing strategy, and determining a specific price.

  • Cost-based pricing is adding a dollar amount or percentage to the cost of the product. Cost-plus pricing is adding a specified dollar amount or percentage to the seller’s cost. Markup pricing is adding to the cost of the product a predetermined percentage of that cost. Demand-based pricing if pricing based on the level of demand for the product. Competition-based pricing is pricing influenced primarily by competitors’ prices.
  • A pricing strategy is an approach of a course or action designed to achieve pricing and marketing objectives. Differential pricing is charging different prices to different buyers for the same quality and quantity of product. Negotiated pricing is establishing a final price through bargaining. Secondary-market pricing is setting one price for the primary target market and a different price for another market. Periodic discounting is temporary reduction of prices on a patterned or systematic basis. Random discounting is temporary reduction of prices on an unsystematic basis. Price skimming is charging the highest possible price that buyers who most desire the product will pay. Penetration pricing is setting prices below those of competing brands to penetrate a market and gain a significant market share quickly.
  • Product-line pricing is establishing and adjusting prices of multiple products within a product line. Captive pricing is pricing the basic product in a product line low while pricing related items at a higher level. Premium pricing is pricing the highest-quality or most versatile products higher than other models in the product line. Bait pricing is pricing an item in the product line low with the intention of selling a higher-priced item in the line. Price lining is setting a limited number of prices for selected groups or lines of merchandise.
  • Psychological pricing is pricing that attempts to influence a customer’s perception of price to make a product’s price more attractive. Reference pricing is pricing a product at a moderate level and positioning it next to a more expensive model or brand. Bundle pricing is packaging together two or more complementary products and selling them for a single price. Multiple-unit pricing is packaging together two or more identical products and selling them for a single price.
  • Everyday low prices is setting a low price for products on a consistent basis. Odd-even pricing is ending the price with certain numbers to influence buyers’ perceptions of the price or product. Customary pricing if pricing on the basis of tradition. Prestige pricing is setting prices at an artificially high level to convey prestige or a quality image. Professional pricing are fees set by people with great skill or experience in a particular field. Price leaders are products priced below the usual mark up, near cost, or below cost. Special-event pricing is advertised sales or price cutting linked to a holiday, season, or event. Comparison discounting is setting a price at a specific level and comparing it with a higher price.

It is necessary that the marketing manager decide the objective of pricing before actually setting price. According to experts, pricing objectives are the overall goals that describe the role of price in an organization’s long-range plans. The objectives help the marketing manager as guidelines to develop marketing strategies. The following are the important pricing objectives.

  1. Market penetration
  2. Market skimming
  3. Target rate of return
  4. Price stabilization
  5. Meet of follow competition
  6. Market share
  7. Profits maximization
  8. Cash flow
  9. Product line promotion
  10. Survival

1. Market Penetration Objective

In the initial stages of entering the market, the entrepreneurs may set a relatively low price. this is mainly to secure a large share of the market. in a highly price sensitive market, the businessman may continue to sell his products even without profit. he is interested in growth rather than in making a profit. in the market penetration objective, the unit cost of production and distribution will decrease when the volume of sales attain a particular target. in brief, market penetration objective is an attempt to secure a large share of the market by deliberately setting the low prices. Penetration pricing pursues the objective of quantity maximization by means of a low price. It is most appropriate when

  • Demand is expected to be highly elastic; that is, customers are price sensitive and the quantity demanded will increase significantly as price declines.
  • Large decreases in cost are expected as cumulative volume increases.
  • The product is of the nature of something that can gain mass appeal fairly quickly.
  • There is a threat of impending competition.

As the product life cycle progresses, there likely will be changes in the demand curve and costs. As such, the pricing policy should be re-evaluated over time.

The pricing objective depends on many factors including production cost, existence of economies of scale, barriers to entry, product differentiation, rate of product diffusion, the firm’s resources, and the product’s anticipated price elasticity of demand .

2. Market Skimming Objective

Market skimming means utilizing the opportunities in the market to reap the benefits of high sales, increased profits and low unit costs. Some of the entrepreneurs study the buyers needs and try to provide the suitable goods, but charge them high prices. This objective is realized in those markets where the magnitude of competition is very low. The entrepreneurs, in this situation, make profits over a short period. The market-skimming objective would not be meaningful, when the consumer refuses to purchase the goods at the prices fixed by the producers. This pricing objective would be suitable in the markets where the consumers feel that costly goods are of the superior quality.

Skimming is most appropriate when:

  • Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive.
  • Large cost savings are not expected at high volumes, or it is difficult to predict the cost savings that would be achieved at high volume.
  • The company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit margins.

3. Target Rate of Return Objective

Rate of return is normally measured in relation to investment and sales. The producers enjoying some protection may prefer to earn a target rate on investment. This would be possible where the entrepreneur enjoys a franchise or a monopolistic situation. But in the long run, every businessman attempts to secure an adequate return on investment through price setting. Mostly, middleman like wholesalers, retailers will price their merchandise to earn a particular rate of return on sales.

4. Price Stabilization Objective

Frequent changes in the prices of product will harm the long-term interests of the companies. Hence, they aim at stabilization of prices. They do not exploit a short supply position to earn the maximum. During the periods of good business, they try to keep prices from rising and during the periods of depression, they keep prices from falling too low. Thus, they take a long-term view in achieving price stability.

5. Meet or Follow Competition Objective

Pricing is often done to meet or even prevent competition. If a company is a price leader, it is better to follow it to ward off the possibility of competition.

6. Market Share Objective

A company may either have the objective of maintaining the present market share or increase its share depending upon its stature. Particularly, big business houses adopt such pricing that it enables them to retain their market share. If they raise their market share, they may draw the attention of the government and if they shed their share, they may lose revenues. Contrary to this, small business houses are found interested in raising their share in the market so as to reap the benefit of large-scale production. In few cases, firms may sell the products even at a lower cost to capture the market. However, such practice may lead to financial crisis. As a matter of fact, this is an objective to be adopted by new firms cautiously.

7. Profit Maximization Objective

Profit maximization does not mean profiteering. There is nothing wrong in this policy if practiced over the long run. As a matter of fact, many of the enterprises strive to maximize their profits. Maximization of profits should be on the total output and not on a single item. In such case, consumers do not get dissatisfied since a particular group is not called for paying a high price. While adopting this pricing objective, the marketers should attempt to project their image in the market through sales promotion techniques. The marketers should watch the reactions of the consumers. Profit maximization through price hikes should be sparingly used.

8. Cash Flow Objective

One of the important objectives of pricing is to recover invested funds within a stipulated period. Most of the time you will find different prices for the cash and credit transactions. Generally, you find lower prices for the cash sales and high prices for the credit sales. But this pricing objective could be implemented with good results only when the firm has monopoly in the market.

9. Product Line Promotion Objective

Product line means a group of products that are related either because they satisfy similar needs of different market segments or because they satisfy different but related needs of a given market segment. While framing the product line, the marketer may also include such goods, which are not popular. The intention of the marketer is to push through all the goods without any discrimination. Thus, the ultimate objective is to increase the overall demand of the goods. In this pricing objective, equal prices are adopted for the entire product line.

10. Survival Objective

Perpetual existence of the business over a period is the indication of the sound financial position of the enterprise. All organizations will have to meet expected and unexpected, initial and external economic losses. These enterprises have to pool up the resources to meet all the contingencies through appropriate pricing strategies. Price is use to increase sale volume to level up the ups and downs that come to the organization.

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