Pricing Objectives and Strategies
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.
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 long-range plans. The objectives help the marketing manager as guidelines to develop marketing strategies. The following are the important pricing objectives.
- Market penetration
- Market skimming
- Target rate of return
- Price stabilization
- Meet of follow competition
- Market share
- Profits maximization
- Cash flow
- Product line promotion
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.
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 entrepreneur's study the buyer's 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.
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.
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.
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.
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.