Marketing Aptitude: Pricing

Pricing is one of the parts of the business’s marketing plan. It is the process whereby a business firm sets the price at which it sells its products and services. While setting prices, the firm takes into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market condition, brand and quality of product. Its main motto is to get the highest possible price for the goods and services it sells whereas the consumer wishes to pay the least possible price for his purchases.

It is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. Price is the only revenue generating element amongst the four Ps. All the other P’s (i.e. product, promotion and place) are a cost centers to the company. Pricing places a vital role in the field of marketing. It is important to both the seller and buyer in the market place.  Pricing is effective only when a business firm set the prices of its products and services by evaluating consumers’ willingness and his capacity of buying the product. Thus, pricing is used as a tactical decision in response to comparing market situation.

 Objectives of Pricing

The Pricing objectives provide the basis for formulating pricing policies, pricing strategies and setting actual prices of goods and services. While deciding on these objectives, the marketing manager consider the aspects of the overall financial, marketing and strategic objectives of the company, the objectives of company’s product or brand, consumer price elasticity and price points, etc. Thus, the overall goals of pricing give direction to the whole pricing process of an organization.  Some of the Pricing Objectives of the business firm are as follows:

  • Profit Maximization: This is the prime pricing strategy to use if a business firm is in a monopoly. In it, a firm’s aim is to maximize profit on total output rather than on each product item. The entire micro-economics is based upon the assumption that buyers and sellers take rational decisions. The rational behavior is defined as an attempt to maximize gains and minimize losses. In operative terms, it means that the basic objective of all individual firms is profit maximization. Here, the firm tries to set its price in a way that more current profits can be earned. Though, the firm cannot set its price beyond the limit. But, it concentrates on maximum profits. Thus, by understanding the profitability objectives, the firm can plan both the short and long-term pricing strategies to garner profit.
  • Target Return on Investment: This is the common objective of well-established and reputed firms in a market to fix a certain rate of return on investment. Target return may be: fixed percentage of sales, return on investment, or a fixed rupee amount. Here, the firm sets its pricing policies and strategies in such a way that sales revenue ultimately yields average return on total investment. For example, company decides to earn 20% return on total investment of Rs. 5 crores. It must set price of product in a way that it can earn Rs. 10 lakh.
  • Target Market Share: The market share of the product is a better indicator of firm’s progress. It means a portion of the industrial sale, which a firm desire to achieve. Thus, a firm, especially at the time of introducing the product should fix somewhat lower prices for its products than those of competitors keeping in view the objective of capturing a big share in the market.
  • Sales Growth: The firm’s main objective is to increase sales volume. It set its prices in such a way that more and more sales can be achieved. It is assumed that sales growth has direct positive impact on the profits. So, pricing decisions are taken in such way that sales volume can be raised. Setting price, altering in price and modifying pricing policies are targeted to improve sales.
  • Survival: When a firm faces survival crises, pricing is used as a tool to increase the market share of an organization or a firm. Basically, this condition occurs in the introductory face of a firm, where it fixes low prices for its products. Once, the firm stabilizes in the market, it shifts to other pricing objectives.
  • Competitive situations: One of the most important objectives of the pricing policy of the firm is to face the competition situation in the market. Thus, a firm should fix the prices of its goods and services keeping in mind the competitive situation.
  • Ability to pay: The pricing policy of the firm should also keep in view the ability of customers to pay.
  • Market Penetration: If the objective of the firm is to restrict the entry of new firms into the market, it adopts the market penetration objective. In it, the marketing manager keeps the price of the firm’s product and services lower with an intention to capture the maximum market area and discourages the competitors to enter the market. It concerns with entering the deep into the market to attract maximum number of customers. Thus, this objective is only possible when market is price-sensitive.
  • Stability of prices: To win the confidence of the customers, firm must adopt a stable pricing policy. The business firms set their product’s price in such a manner that it builds a good deal of image for them. Some prefers higher price that considered as a reflection of better quality, while some prefers a ‘low price’ strategy for image building among their customers.