Pricing Objectives

Pricing Objectives

Pricing objectives

Pricing objectives focus on what a company wants to achieve through establishing prices. These objectives should be clear, concise, and understood by all involved in pricing decisions. Pricing objectives affect decisions in various other functional areas such as finance and production etc. and must be in accordance with company’s overall mission and objectives. There is the diversity of objectives and generally, companies have multiple pricing objectives. Some of these objectives may be short-term and others long-term. Besides, to respond to changing market conditions, companies generally alter pricing objectives as and when desirable. Most companies do not lose sight of the fact that a price is a strategic tool and do not simply let costs or the market determine the prices. Some major types of pricing objectives are shown in Table 8.1.
Pricing Objectives
Survival: This is the broadest and most fundamental pricing objective of any company because staying in business is important under difficult conditions such as overcapacity, intense cut-throat competition, and changing consumer’s wants and preferences. Most firms will tolerate difficulties but only as long as prices cover variable costs and even a small part of fixed costs, they can stay in business and device methods of adding value.
Profit: Many companies set profit maximization as their pricing objective. Profit maximization is likely to be more beneficial over the long-run. The firm, however, may have to accept modest profits or sometimes even losses over the short-term. The major problem with maximization objective is that it is difficult to measure whether profit maximization has been accomplished. It is almost impossible to establish what could be the maximum possible profit. Because of this difficulty, maximization objective is rarely set and companies settle down to a profit figure or some percentage change over a previous period that its decision- makers view as optimum profit.
Return on Investment (ROI): ROI is also a profit objective and aims at achieving some specified rate of return on company’s investment. Large companies such as Tata or Reliance are in a better position to set pricing objectives in terms of ROI. They may decide to establish pricing objectives usually independent of competition than do smaller companies. Return on investment pricing objectives is set by trial and error because all relevant cost and revenue data are not available to project the ROI at the time of price setting. ROI pricing objectives do not take into account competitive prices and consumers’ perceptions of price.

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