Pricing and Sales Promotion:PRICING OBJECTIVES

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1. PRICING OBJECTIVES
Profit Objectives

Pricing objectives need to be measured precisely. Performance can then be compared with objectives to assess results. In practice, the objective of profit maximization may be realized in multiple ways. In some markets, relatively low prices result in greater sales and higher profits. But in other markets, relatively high prices result in slightly decreased unit sales and also higher profits. Thus, the profits of some firms may be based on low prices and high sales volume, while for other firms high prices and low sales volume may be more profitable. Another common pricing objective is some form of target return on investment, that is, regaining a specified percentage of investment as income. Return on investment (ROI) is expressed as the ratio of profits to investments. For manufacturers, investments include capital, machinery, buildings, and land, as well as inventory. For wholesalers and retailers, inventory and buildings constitute the bulk of investments.

Volume-Based Objectives

Some organizations set pricing objectives in terms of sales volume. A common goal is sales growth, in which case the firm sets prices to increase demand. Other firms may seek sales maintenance, knowing that growth does not ensure higher profits and that they may not have the resources needed to pursue sales growth.

If capturing a high market share is a marketing objective, pricing objectives should reflect this goal. In general, a high market share is achieved by setting prices relatively low to increase sales. From a profitability perspective, the organization must be willing to accept lower initial profits in exchange for the profits that may be produced over time by increased volume and high market share. However, other companies achieve a strong position in selected markets by setting high prices and offering high-quality products and service.

Competitive Objectives

At times, firms base their pricing objectives on competitive strategies. Sometimes, the goal is to achieve price stability and engage in nonprice competition, while at other times, they price aggres- sively. When marketing a mature product and when the firm is the market leader, it may seek to stabilize prices. Price stability often leads to nonprice competition in which a firm’s strategy is advanced by other components of the marketing mix: the product itself, the distribution system, or the promotional efforts.

In some markets, a firm may choose to price aggressively, that is, price below competition, to take advantage of market changes, for example, when products are in early stages of the life cycle, when markets are still growing, and when there are opportunities to establish or gain a large market share. As with a market share or volume objective, this aggressiveness must be considered within the context of a longer term perspective.

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