Multi 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.
Pricing objectives are goals that describe what a firm wants to achieve through pricing. Pricing objectives must be stated explicitly, and the statement should include the time frame for accomplishing them. There are six stages of setting prices. They are developing pricing objective, assessing the target market’s evaluation of price, evaluating competitors’ prices, choosing a basis for pricing, selecting a pricing strategy, and determining a specific price.
Cost-based pricing is adding a dollar amount or percentage to the cost of the product. Cost-plus pricing is adding a specified dollar amount or percentage to the seller’s cost. Markup pricing is adding to the cost of the product a predetermined percentage of that cost. Demand-based pricing if pricing based on the level of demand for the product. Competition-based pricing is pricing influenced primarily by competitors’ prices.
A pricing strategy is an approach of a course or action designed to achieve pricing and marketing objectives. Differential pricing is charging different prices to different buyers for the same quality and quantity of product. Negotiated pricing is establishing a final price through bargaining. Secondary-market pricing is setting one price for the primary target market and a different price for another market. Periodic discounting is temporary reduction of prices on a patterned or systematic basis. Random discounting is temporary reduction of prices on an unsystematic basis. Price skimming is charging the highest possible price that buyers who most desire the product will pay. Penetration pricing is setting prices below those of competing brands to penetrate a market and gain a significant market share quickly.
Product-line pricing is establishing and adjusting prices of multiple products within a product line. Captive pricing is pricing the basic product in a product line low while pricing related items at a higher level. Premium pricing is pricing the highest-quality or most versatile products higher than other models in the product line. Bait pricing is pricing an item in the product line low with the intention of selling a higher-priced item in the line. Price lining is setting a limited number of prices for selected groups or lines of merchandise.
Psychological pricing is pricing that attempts to influence a customer’s perception of price to make a product’s price more attractive. Reference pricing is pricing a product at a moderate level and positioning it next to a more expensive model or brand. Bundle pricing is packaging together two or more complementary products and selling them for a single price. Multiple-unit pricing is packaging together two or more identical products and selling them for a single price.
Everyday low prices is setting a low price for products on a consistent basis. Odd-even pricing is ending the price with certain numbers to influence buyers’ perceptions of the price or product. Customary pricing if pricing on the basis of tradition. Prestige pricing is setting prices at an artificially high level to convey prestige or a quality image. Professional pricing are fees set by people with great skill or experience in a particular field. Price leaders are products priced below the usual mark up, near cost, or below cost. Special-event pricing is advertised sales or price cutting linked to a holiday, season, or event. Comparison discounting is setting a price at a specific level and comparing it with a higher price.
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’s long-range plans. The objectives help the marketing manager as guidelines to develop marketing strategies. The following are the important pricing objectives.
Target rate of return
Meet of follow competition
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.
Penetration pricingpursues the objective of quantity maximization by means of a low price. It is most appropriate when
Demand is expected to be highly elastic; that is, customers are price sensitive and the quantity demanded will increase significantly as price declines.
Large decreases in cost are expected as cumulative volume increases.
The product is of the nature of something that can gain mass appeal fairly quickly.
There is a threat of impending competition.
As theproduct lifecycleprogresses, there likely will be changes in the demand curve and costs. As such, the pricing policy should be re-evaluated over time.
The pricing objective depends on many factors including production cost, existence of economies of scale, barriers to entry, product differentiation, rate of product diffusion, the firm’s resources, and the product’s anticipatedprice elasticity of demand .
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 entrepreneurs study the buyers 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.
Skimming is most appropriate when:
Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive.
Large cost savings are not expected at high volumes, or it is difficult to predict the cost savings that would be achieved at high volume.
The company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit margins.
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 objectives:
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.
Profit maximization objective:
Profit maximization does not mean profiteering. There is nothing wrong in this policy if practiced over the long run. As a matter of fact, many of the enterprises strive to maximize their profits. Maximization of profits should be on the total output and not on a single item. In such case, consumers do not get dissatisfied since a particular group is not called for paying a high price. While adopting this pricing objective, the marketers should attempt to project their image in the market through sales promotion techniques. The marketers should watch the reactions of the consumers. Profit maximization through price hikes should be sparingly used.
Cash flow objective:
One of the important objectives of pricing is to recover invested funds within a stipulated period. Most of the time you will find different prices for the cash and credit transactions. Generally, you find lower prices for the cash sales and high prices for the credit sales. But this pricing objective could be implemented with good results only when the firm has monopoly in the market.
Product line promotion objective:
Product line means a group of products that are related either because they satisfy similar needs of different market segments or because they satisfy different but related needs of a given market segment. While framing the product line, the marketer may also include such goods, which are not popular. The intention of the marketer is to push through all the goods without any discrimination. Thus, the ultimate objective is to increase the overall demand of the goods. In this pricing objective, equal prices are adopted for the entire product line.
Perpetual existence of the business over a period is the indication of the sound financial position of the enterprise. All organizations will have to meet expected and unexpected, initial and external economic losses. These enterprises have to pool up the resources to meet all the contingencies through appropriate pricing strategies. Price is use to increase sale volume to level up the ups and downs that come to the organization.
Target Return – sometimes the vendor specifies a specific dollar amount or percentage amount that the price will be offered at in order to make a profit which has been calculated for a specific purpose. Usually this amount is part of a larger plan involving several product units in a product line
Maximize Profits – if the Competitive Market is not intense you may charge the highest price the market will bear because sometimes you may have an advantage for reasons based on
your geographic advantage special features not available on other competitors’ products very very famous brand. etc..
Sales / Marketing Oriented: Increase Sales Volume
Sales / Marketing Oriented: Increase Market Share
Status Quo Goals: Just Meet the Competition – if the customer has many choices, and you barely have the resources to stay in the market, then just charge the same price. You don’t have the resources to survive a price war, and you don’t have the ability to claim better quality to charge a higher price
Prof. Allen says
“Volume objectives include sales maximization and market-share goals, which are specified as a percentage of certain markets. In sales maximization, management sets an acceptable level of profitability and then tries to maximize sales. This objective can lead to discounting or some other aggressive pricing strategy, such as rebates and sales. “
“Skim the cream” pricing involves selling at a high price to those who are willing to pay before aiming at more price-sensitive consumers.
This expression comes from the farming practice of milking cows – the cream rises to the top and you skim it off.
“A Skimming policy is more attractive if demand is inelastic” says the Shapiro text
– remember inelastic means there are no close substitutes
– products that people will pay a high price for because there is nothing else they can buy the is close to the item
Prof. Allen says
“A skimming pricing policy involves setting prices of products relatively high compared to those of similar products and then gradually lowering prices. The skimming price is the highest price possible that buyers who most desire the product will pay (skim the cream off the top — skim the innovators). This market segment is more interested in quality, status, uniqueness, etc. This policy is effective in situations where a firm has a substantial lead over competition with a new product.”
Example: A great example of Skimming is DVD players in the late 1990’s and early 2000’s – in the late 1990’s DVD players sold for $500 and $400 when they first came out, then the price dropped to less than $100 by 2001 by 2004 you can get them for $50 or $60 at many different types of stores.
to make it too intimidating for competition to follow,
or to make sure you enter the market in a competitive environment
or as part of a brand building strategy
Prof. Allen says
“A penetration pricing policy involves setting prices of products relatively low compared to those of similar products in the hope that they will secure wide market acceptance that will allow the company to later raise its prices. Such a policy is often used when the firm expects competition from similar products within a short time and when large-scale production and marketing will produce substantial reductions in overall costs. The low price must help keep out the competition, and the company must maintain its low price position.”
can be seasonal
can be based on volume or amount bought
can be used to attract a form of payment e.g, CA$H
Prof. Allen says
“Discount and allowance pricing has the effect of reducing prices to reward customer responses such as paying early or promoting the product. A recent pricing issue is that of everyday low pricing, where the retailer charges a constant, lower price at all times, with no temporary price discounts. Wal-Mart has led the trend toward everyday low pricing.
F.O.B. – basically, this is the price out the door at our factory – you come and get it
C.I.F. – the cost at our factory + the insurance and freight to ship it to you
ZONE – if you live close, it is cheaper, if you live farther away, we add in shipping costs ZONE pricing used for everything from Pizza delivery to clothing to grain shipments
Basing-point pricing means that all customers are charged freight from a specified billing location.
Freight-absorption pricing, the seller pays all shipping costs to get the desired business.
Prof. Allen says
“Price is influenced by geography, where the company decides on how to price to distant customers. Free On Board or FOB-origin pricing is a geographical pricing strategy in which goods are placed free on board a carrier; the customer pays the actual freight from the factory to the destination. Because the customer picks up its own cost, supporters believe that this method is the fairest way to assess freight charges. “
Some of the more pricing objectives are…
Maximize long run profit
Maximize short run profit
Increase sales volume
Increase monetary sale
Increase market share
Obtain a target rate of return on investment
Obtain a target rate of return on sale
stabilize market or stabilize market price: an objective to stabilize price means that the marketing manager attempts to keep prices stable in the marketplace and to compete on non-price considerations. Stabilization of margin is basically a cost-plus approach in which the manager attempts to maintain the same margin regardless of changes in cost.
maintain price of leadership
desensitize customers to price
discourage new entrants into the industry
match competitors prices
encourage the exit of marginal firms from the industry
avoid government investigation or intervention
obtain or maintain the loyalty and enthusiasm of distributers and other sales personnel
enhance the image of the firm, brand, and product
be perceived as “fair” by customers and a potential customers
create interest and excitement about a product
discourage competitors from cutting prices
use price to make the product “visible”
build store traffic
help prepare for the sale of the business (harvesting)
social, ethical, or ideological objectives
get competitive advantage
Themarketing mixis probably the most famous marketing term. Its elements are the basic, tactical components of a marketing plan. Also known as theFour P’s, the marketing mixelements areproduct, price, promotion, place.
4 P’S OF MARKETING MIX
A tangible object or an intangible service that ismass producedor manufactured on a large scale with a specific volume of units. Intangible products are often service based like thetourism industry& thehotel industryor codes-based products like cellphone load and credits. Typical examples of a mass produced tangible object are themotor carand the disposablerazor. A less obvious but ubiquitous mass produced service is acomputer operating system. Company should produce product according to customers needs and want because the motive of pricing pricing objective is profit maximisation.
The price is the amount a customer pays for the product. It is determined by a number of factors including market share, competition, material costs, product identity and the customer’s perceived value of the product. The business may increase or decrease the price of product if other stores have the same product. Company should set their price according to customers budget to earn more profit.
One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions, and promotion.
THE Place represents the location where a distribution channel. It can include any physical store as well as virtual stores on the Internet. Companies set their price according to place if target place is rural and backward then they should reduse their prices and if the target place is modern urban then the company charge more price according to its brand image and get more profit.
Represents all of the communications that a marketer may use in the marketplace. Promotion has four distinct elements -advertising,public relations,word of mouthandpoint of sale. A certain amount of crossover occurs when promotion uses the four principal elements together, which is common in film promotion. Advertising covers any communication that is paid for, from cinema commercials, radio and Internet adverts through print media and billboards. Public relations are where the communication is not directly paid for and includes press releases, sponsorship deals, exhibitions, conferences, seminars or trade fairs and events. Word of mouth is any apparently informal communication about the product by ordinary individuals, satisfied customers or people specifically engaged to create word of mouth momentum. Sales staff often plays an important role in word of mouth and Public Relations.
Packaging also needs to be taken into consideration. Broadly defined, optimizing the marketing mix is the primary responsibility of marketing. By offering the product with the right combination of the four Ps marketers can improve their results and marketing effectiveness. Making small changes in the marketing mix is typically considered to be a tactical change.Parm Bains says Making large changes in any of the four Ps can be considered strategic. For example, a large change in the price, say from $19.00 to $39.00 would be considered a strategic change in the position of the product. However a change of $130 to $129.99 would be considered a tactical change, potentially related to a promotional offer.
The term ‘marketing mix’ however, does not imply that the 4P elements represent options. They are not trade-offs but are fundamental marketing issues that always need to be addressed. They are the fundamental actions that marketing requires whether determined explicitly or by default.
The main objective is profit maximisation so company promote its brand and invest more money and get maximum profit.
INFLUENCE THE MARKETING MIX
Before the product is developed, the marketing strategy is formulated, including target market selection and product positioning. There usually is a tradeoff between product quality and price, so price is an important variable in positioning.
Because of inherent tradeoffs betweenmarketing mixelements, pricing will depend on other product, distribution, and promotion decisions.
ESTIMATE THE DEMAND CURVE
Because there is a relationship between price and quantity demanded, it is important to understand the impact of pricing on sales by estimating thedemand curvefor the product.
For existing products, experiments can be performed at prices above and below the current price in order to determine theprice elasticity of demand. Inelastic demand indicates that price increases might be feasible.
CALCULATE THE COST
If the firm has decided to launch the product, there likely is at least a basic understanding of the costs involved, otherwise, there might be no profit to be made. The unit cost of the product sets the lower limit of what the firm might charge, and determines the profit margin at higher prices.
The total unit cost of a producing a product is composed of the variable cost of producing each additional unit and fixed costs that are incurred regardless of the quantity produced. The pricing policy should consider both types of costs.
Themarket environmentis amarketingterm and refers to all of the forces outside of marketing that affect marketing management’s ability to build and maintain successful relationships with target customers. Themarket environmentconsists of both the macro environment and the microenvironment
The microenvironment refers to the forces that are close to the company and affect its ability to serve its customers. It includes the company itself, its suppliers, marketing intermediaries, customer markets,competitors, and publics.
The company aspect of microenvironment refers to the internal environment of the company. This includes alldepartments, such as management,finance,research and development,purchasing,operations andaccounting. Each of these departments has an impact on marketing decisions. For example, research and development have input as to the features a product can perform and accounting approves the financial side of marketing plans and budgets.
Thesuppliersof a company are also an important aspect of the microenvironment because even the slightest delay in receiving supplies can result in customer dissatisfaction. Marketing managers must watch supply availability and other trends dealing with suppliers to ensure that product will be delivered to customers in the time frame required in order to maintain a strong customer relationship.
Marketing intermediaries refers to resellers, physical distribution firms, marketing services agencies, andfinancial intermediaries. These are the people that help the company promote, sell, and distribute its products to final buyers. Resellers are those that hold and sell the company’s product. They match the distribution to the customers and include places such asWal-Mart, Target, andBest Buy. Physical distribution firms are places such as warehouses that store and transport the company’s product from its origin to its destination. Marketing services agencies are companies that offer services such as conductingmarketing research, advertising, and consulting. Financial intermediaries are institutions such as banks, credit companies andinsurance companies.
Another aspect of microenvironment is the customers. There are different types of customer markets including consumer markets, business markets, government markets,international markets, and reseller markets. The consumer market is made up of individuals who buygoods and servicesfor their own personal use or use in their household. Business markets include those that buy goods and services for use in producing their own products to sell. This is different from the reseller market which includes businesses that purchase goods to resell as is for a profit. These are the same companies mentioned as market intermediaries. The government market consists of government agencies that buy goods to producepublic servicesor transfer goods to others who need them. International markets include buyers in other countries and includes customers from the previous categories.
Competitors are also a factor in the microenvironment and include companies with similar offerings for goods and services. To remain competitive a company must consider who their biggest competitors are while considering its own size and position in the industry. The company should develop a strategic advantage over their competitors.
The final aspect of the microenvironment is publics, which is any group that has an interest in or impact on the organization’s ability to meet its goals. For example, financial publics can hinder a company’s ability to obtain funds affecting the level of credit a company has. Media publics include newspapers and magazines that can publish articles of interest regarding the company and editorials that may influence customers’ opinions. Government publics can affect the company by passing legislation and laws that put restrictions on the company’s actions. Citizen-action publics include environmental groups andminority groupsand can question the actions of a company and put them in the public spotlight. Local publics are neighborhood and community organizations and will also question a company’s impact on the local area and the level of responsibility of their actions. The general public can greatly affect the company as any change in their attitude, whether positive or negative, can cause sales to go up or down because the general public is often the company’scustomer base. And finally, the internal publics include all those who are employed within the company and deal with the organization and construction of the company’s product.
The macro environment refers to all forces that are part of the larger society and affect the microenvironment. It includes concepts such as demography, economy, natural forces, technology, politics, and culture.
Demographyrefers to studying human populations in terms of size, density, location, age, gender, race, and occupation. This is a very important factor to study for marketers and helps to divide the population intomarket segmentsandtarget markets. An example of demography is classifying groups of people according to the year they were born. These classifications can be referred to asbaby boomers, who are born between 1946 and 1964,generation X, who are born between 1965 and 1976, andgeneration Y, who are born between 1977 and 1994. Each classification has different characteristics and causes they find important. This can be beneficial to a marketer as they can decide who their product would benefit most and tailor theirmarketing planto attract that segment. Demography covers many aspects that are important to marketers including family dynamics, geographic shifts, work force changes, and levels of diversity in any given area.
Another aspect of the macro environment is the economic environment. This refers to thepurchasing powerof potential customers and the ways in which people spend their money. Within this area are two different economies, subsistence and industrialized. Subsistence economies are based more in agriculture and consume their own industrial output. Industrial economies have markets that are diverse and carry many different types of goods. Each is important to the marketer because each has a highly different spending pattern as well as differentdistribution of wealth.
The natural environment is another important factor of the macro environment. This includes the natural resources that a company uses as inputs and affects their marketing activities. The concern in this area is the increased pollution, shortages of raw materials and increased governmental intervention. As raw materials become increasingly scarcer, the ability to create a company’s product gets much harder. Also, pollution can go as far as negatively affecting a company’s reputation if they are known for damaging the environment. The last concern,government interventioncan make it increasingly harder for a company to fulfill their goals as requirements get more stringent.
The technological environment is perhaps one of the fastest changing factors in the macroenvironment. This includes all developments from antibiotics and surgery tonuclear missilesandchemical weaponsto automobiles andcredit cards. As these markets develop it can create new markets and new uses for products. It also requires a company to stay ahead of others and update their own technology as it becomes outdated. They must stay informed of trends so they can be part ofthe next big thing, rather.