Why Pricing Objectives are Fundamental to Business Success

By Moira McCormick on August 3, 2017

Why Pricing Objectives are Fundamental.jpeg

Pricing objectives are the goals that guide your business in setting the cost of a product or service to your existing or potential consumers.

A pricing objective underpins the pricing process for a product and it should reflect your company's marketing, financial, strategic and product goals, as well as consumer price expectations and the levels of your available stock and production resources.

Some examples of pricing objectives include maximising profits, increasing sales volume, matching competitors' prices, deterring competitors – or just pure survival. 

Each pricing objective requires a different price-setting strategy in order to successfully achieve your business goals. It requires you to have a firm understanding of both your product attributes and the market.

Your choice of a pricing objective does not have to last forever.  As business and market conditions change, adjusting your pricing objective may become necessary or appropriate.  

 

How to Choose a Pricing Objective

Pricing objectives are selected with your business and financial goals in mind. Elements of your business plan can guide your choice of a pricing objective and the strategies that go with it.

Give due consideration to your business’s mission statement and plans for the future. If one of your overall business goals is to become market leader then you’ll want to consider the quantity maximisation pricing objective as opposed to the survival pricing objective.

If your business mission is to be a leader in your industry, you may want to consider a quality leadership pricing objective. On the other hand, profit margin maximisation may be most appropriate if your business plan calls for growth in production in the near future, since you will need funding for facilities and labour.

Some objectives, such as survival and price stability will be used when market conditions are poor or shaky, when first entering a market, or when a business is experiencing hard times and needs to restructure.

 

Heads Up, Dynamic Pricing is Changing Ecommerce

 

Pricing for Profit

This objective is aimed, simply, at making as much money as possible for your business – and to maximise price for long-term profitability.

Price has both a direct and indirect effect on your profits - the direct effect relates to whether the price actually covers the cost of producing the product. Price affects profit indirectly by influencing how many units sell. The number of products sold also influences profit through economies of scale, i.e. the relative benefit of selling more units.

  • Profit margin maximisation: seeks to maximise the per-unit profit margin of a product. This objective is typically applied when the total number of units sold is expected to be low.
  • Profit maximisation: seeks to earn the greatest pound amount in profits. This objective is not necessarily tied to the objective of profit margin maximisation.

 

Sales-related Objectives

Sales-oriented pricing objectives seek to boost volume or market share. A volume increase is measured against a company's own sales across specific time periods.

A company's market share measures its sales against the sales of other companies in the industry. Volume and market share are independent of each other, as a change in one doesn't necessarily activate a change in the other.

The main sales-related pricing objectives include:

  • Sales growth: It is assumed that sales growth has a direct positive impact on profits so pricing decisions are taken in way that sales volume can be raised. Setting a price, altering or modifying policies are targeted to improve sales.
  • Targeting market share: Pricing decisions are taken in such a way that enable your company to achieve targeted market share. Market share is a specific volume of sales determined in the light of total sales in an industry. For example, your company may try to achieve a 25% market share in the relevant industry.
  • Increase in market share: Sometimes, price and pricing are taken as the tools to increase market share. When you realise that your market share is lower than expected it can be raised by appropriate pricing; pricing is aimed at improving market share.

 

Competition-related Objectives

Every company tries to react to their competitors with appropriate business strategies. With reference to price they may wish:

  • To face up to the competition: today’s markets are characterised by intense competition and companies set and modify their pricing policies so as to respond to their competitors.  Many companies use price as a powerful tool to react to the level and strength of competition.
  • To deter competitors: to prevent the entry of competitors can be one of the main pricing objectives.  To achieve this objective, a company keeps its price as low as possible to minimise profit attractiveness of products. In some cases, a company reacts offensively to prevent entry of competitors by selling products at a loss.
  • Signal quality: buyers believe that a high price is related to high quality.  In order to create a positive image in customers' minds that your product is superior to that offered by close competitors you will design your prices accordingly. 

 

Increasing prices doesn't automatically mean losing customers.

- Peter Hill

 

 

Customer-related Objectives

Customers should be central to every marketing decision so, in order to keep customers on your side you need suitable pricing policies and practices to win the confidence of customers:

Customers are your "targets".  Your company should be setting its pricing policies to win over the confidence of your target market.  By appropriate pricing, you can establish, maintain or even strengthen the confidence of customers that the price charged for your product(s) is fair and that they are not being cheated.

To increase customer satisfaction: to satisfy customers should be the prime objective of all marketing efforts and pricing is no exception. Your company should set, adjust, and readjust its pricing to satisfy its target customers. In short,  design pricing in such a way that results in maximum customer satisfaction.

 

Market Penetration

This objective is concerned with entering deep into the market to attract the maximum number of customers. This objective calls for charging the lowest possible price to win price-sensitive buyers. A penetration strategy might be right for you if you are in a position to rapidly gain market share, bring down unit costs and purposefully price low to create barriers to entry: think Amazon, Uber, Facebook.  

You will make a grab for market share and then expand but must appreciate that a penetration strategy is most risky from a profit and revenue standpoint.  You will need to be able to gain huge market share rapidly and follow through on future price increases.  If you gain customers early in such markets you are better positioned to maximise customers' lifetime value from future sales and upsells.

 

Skimming

This expression comes from the farming practice of milking cows - the cream rises to the top and you skim it off.

From a business perspective, this pricing objective is concerned with skimming maximum profit in the initial stage of a product's life cycle. Because the product is new, offering new and superior advantages, your company can charge a relatively high price because you are catering to customers with a higher willingness to pay, i.e. the early adopters.  

Certain customer segments will buy a product even at a premium price in order to be ahead of the game.   Later you can aim at more price-sensitive consumers with a lower price. Some prime examples are purchasers of movies, music, online games, gaming consoles (Microsoft Xbox), smartphones (iPhone) and luxury vehicles.

The advantage of using a Skimming pricing policy is that you can theoretically get the maximum profit from each level of customer.  You need to bear in mind however that you can only charge the high price for your product when there are no close substitutes.

 

Stabilising

This objective seeks to keep your product prices in line with the same or similar products offered by your competitors to maintain a stable level of profit generated from a particular product – or to avoid starting a price war where no one wins.  It's a tactical goal that encourages competition on factors other than price and focuses on maintaining market share.

Stability in price makes a good impression on your buyers - frequent changes in pricing can adversely affect the prestige of your company.

 

Survival

This is perhaps the most fundamental of all pricing objectives.  Pricing is aimed at survival with a hope for growth in the (not too far distant) future.  Your company may use a survival-based pricing objective when it's willing to accept short-term losses for the sake of long-term viability.

Under this objective, pricing can be flexible – prices are lowered in order to increase sales enough to keep the business going, i.e. cover essential costs. For a short term, on a temporary basis, the goal of making a profit is set aside for the objective of survival.   Once the situation that initiated the survival pricing has passed, product prices should be returned to previous or more appropriate levels.

 

Excel Pricing is Holding Back Your Company
 

Related Posts

7 Proven Ways To Increase Revenue

Here Are Effective Revenue Management Strategies You Can Use Today

How To Get The Most Out Of Pricing Software

What Pricing Approach Do I Need to Reach my Business Objective?

    Most Popular

    Topics

    See all