Pricing a product requires an understanding of the company’s goals before determining the price. It is important for a company to establish its pricing objectives before determining prices. Because pricing methods and policies are directly influenced by pricing objectives, it is important to state them explicitly.
Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Status-quo Pricing Objectives
A) Profit-Oriented Pricing Objectives
a) Ensure that target returns are achieved:
Prices may be set so that a company’s investment or sales yield a certain percentage return. In order to cover anticipated operating costs plus the desired profit, a company sets a percentage markup on sales or investments. In some industries or markets, market practices may affect the actual percentage and in others, competition may affect it as well. To discourage potential competitors, some companies set relatively moderate objectives. It is not uncommon for others who expect relatively little competition to set very high short-term goals. It is typical for manufacturers that are leaders in their industry to set a long-term return on investment goal.
Two reasons usually motivate them to adopt this objective. The dominant firm as well as the smaller ‘follower’ firms in the industry can independently set pricing objectives. The second reason is that management can evaluate the performance of the various divisions of large multidivisional companies based on an objective target return objective.
b) Profit maximization:
In the short- or long-term, some companies set their prices to maximize profits or to make as much money as possible. Pricing products or services at high prices is not always the best way to maximize profits. There are two ways to apply it. Ensure that each item marketed maximizes profit. Secondly, maximize sales or production profits.
Instead of maximizing profits on each individual item, the goal should be to maximize profit on total output. Occasionally, companies must accept short-term losses in order to maximize profit over the long term. A very small profit or even loss on well-known items, such as leader items, is one of the best ways to maximize profits. Small businesses generally adopt this type of goal. Ideally, profit should be acceptable to both customers and the company, i.e., reasonable and able to satisfy both.
B) Sales-Oriented Pricing Objectives
a) Increasing sales volume:
In general, companies that adopt this goal increase their sales volume over time by a certain percentage. Profits are not discouraged by this. There is a strong argument for equating annual sales volume growth with growth in profits since sales volume growth leads to profits as well. It may be necessary for companies to offer concessionary prices or even lose money on their products in order to accomplish these objectives. The loss of short-term profits may be acceptable to companies in exchange for the gain of long-term success.
b) Increasing market share or maintaining it:
Market share can be maintained or expanded by capturing new markets for some companies. It is possible that these objectives will lead to prosperity with handsome profits for the companies in the long term. In some cases, these growth objectives may result in profitless prosperity or even bankruptcy due to slight miscalculations.
C) Status-quo Pricing Objectives
As a result of the status-quo objective, it is also known as not rocking the boat. As a means of minimizing the risk of loss and preserving their position in the market, big companies pursue this objective. Pricing objectives that maintain the status quo are the least aggressive.
a) Price stability:
There can be frequent and significant fluctuations in demand for products in industries. This scenario involves some large companies maintaining their pricing stability and preventing market instability. Their status or goodwill is built up as a result of these objectives. This type of role is typically played by companies that are price leaders.
b) Meeting competition:
A company may price its products or services to compete with its competitors. Due to the difficulty of implementing these objectives, only a small number of competent companies can do so.