Objectives of pricing
Objectives of pricing
The objective of pricing should be the same as the objective of the firms existence. If it is a profit oriented company, the strategy used for fixing the price also profit oriented. If it is a non-profit organization, the objective of the pricing would be non-profit oriented. At the same time a firm can pursue more than one objective in the area of pricing. A firm should have the following objectives in its mind before fixing price of its products.
- Maximize profit in the short run as well as in the long run.
- Maintain good relations with the consumers
- Maintain good relations with the workers
- Also comply with the legal requirements imposed by the Government regarding pricing.
- Increase sales and maintain goodwill.
To pursue all the above goals, a firm has to strike a balance between all the above objectives. The pricing should be harmonious with the objectives of the organization.
Objectives of the pricing can be classified in to the following 3 categories:
1. Profit Oriented Objectives
2. Sales Volume Objectives
3. Other objectives.
I Profit oriented objectives
The major objective of pricing is profit oriented. Traditional pricing objective of a business enterprise is profit maximization. Profit oriented objectives can be divided in to the following to categories:
1 Profit Maximization
2. To achieve Desired Return on Investment
Profit Maximization is the most common objectives of business organizations. This result in heavy margin of profit and high prices. Objective of profit maximization lead to high prices and consumer exploitation. If profit maximization is the objective of the firm, it will estimate the demand and costs at different prices, and select the price which will bring maximum profits. This objective is beneficial for the organization. But to maximize profit in long run, the firm sometimes have to accept short term losses. To attract customers a company which is entering into a new market or introducing a new product often fix low prices.
To achieve Desired Return on Investment: A firm may fix the price of its product at a level which helps in achieving a fair return on the investment. Some companies calculate the manufacturing and distribution cost and add a reasonable profit margin to it. This will ensure a fair return on the investment. The actual rate of return differs from company to company and industry to industry. Pricing strategy of achieving a target return on investment is generally used by manufacturers who are leaders in their industry so that they can get their pricing goals more independent of competitors.
II Sales Volume Oriented Objectives
To increase the firm's market share or sales volume, some companies use following pricing strategy:
1. Maximization of Sales Volume
2. Maximazation of Market Share.
Maximization of Sales Volume: Some companies opt for maximizing the sales volume by resorting to price cuts or heavy discounts which may result in actual loss to the company. Management is willing to take short term loss in order to increase the sales volume. Once the product positioned in the market, they gradually increase the price and make profit. In such situations the company will set a minimum or lowest acceptable profit level and then seek to maximize sales. They believe that the increased sales are more important in long run than immediate high profits.
Maximization of Market Share: Market share is the better indicator of corporate strength. So big organizations are interested in increasing the market share. When the total market is growing and the competitor also may be growing at a fast rate, to check the growth of the competitor, companies keep a close watch on their market share. Pricing of the product will be adjusted so that the market share can be increased, as good market share guarantees long term profit for the company.
III Other Objectives
Other than the above objectives of pricing, there are some other important considerations in setting up the price of a product. They are:
1. To Improve Company Image as a Quality Goods Supplier
2. To Prevent Competitors Entry
3. To Survive
4. To Stabilize Prices
To Improve company image as a quality goods supplier: For supplying high quality goods, the company may have to incur heavy expenditure in production. As the expenditure increases the price also increase.
To prevent Competitors Entry: Sometimes it is important for a manufacturer to prevent the possible entry of a competitor than earning profit in the short run. By lowering the price of the product, companies try to discourage the competitor. No one would enter into a market where there is no attractive profit in doing the business. To divert the attention of the competitor from the profit, manufactures adjust the price of the products. This strategy is also known as market penetration objective. This strategy prevent the potential competitor from entering into the market.
To survive: When a company faces lack or demand for its product or overcapacity or facing stiff competition, its objective may be to survive in the business. In such circumstances a company may set low prices so that it can stay in the business for the time being.
To stabilize prices: When a company is faced by a big competitor who acts as a price leader and where the product is a standard one, in order to minimize competition, the company will follow the leader's prices. It can avoid price war between companies. At most of the times the companies will follow the price of the leader.