Objectives of Pricing

 

Objectives of Pricing

The objective of pricing should be the same as the objective of the firm's 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 the price of its products.

1. Maximize profit in the short run as well as in the long run.
2. Maintain good relations with the consumers.
3. Maintain good relations with the workers.
4. Also, comply with the legal requirements imposed by the Government regarding pricing.
5. 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 into the following 3 categories:

1. Profit Oriented Objectives.
2. Sales Volume Oriented Objectives.
3. Other objectives.

Profit Oriented Objectives

The core objective of pricing is profit-oriented. The traditional pricing objective of a business enterprise is profit maximization. Profit-oriented objectives can be divided into the following two categories:

1. Profit Maximization.
2. To achieve Desired Return on Investment.

Profit Maximization: Profit maximization is the most general objective of business organizations. These results in a heavy margin of profit and high prices. The objective of profit maximization leads to soaring 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 that will generate maximum profits. This objective is beneficial for the organization. But to maximize profit in the long run, the firm sometimes has to accept short-term losses. To attract customers, a company that is entering into a potential market or introducing a new product often fix low prices.

To achieve the Desired Return on Investment: A firm may fix the price of its product at a level that helps in achieving a reasonable 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. The pricing strategy of achieving a target return on investment is predominantly used by manufacturers who are leaders in their industry so that they can get their pricing goals more independent of competitors.

Sales Volume Oriented Objectives.

To increase the firm's market share or sales volume, some companies use the following pricing strategy:

1. Maximization of Sales Volume.
2. Maximization 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 an actual loss to the company. Management is willing to take a short-term loss in order to increase sales volume. Once the product is positioned in the market, they gradually increase the price and make a profit. In such situations, the company will set a minimum or lowest acceptable profit level and then seek to maximize sales. They believe that increased sales are more important in the long run than immediate high profits.

Maximization of Market Share: Market share is a 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 a good market share guarantees a long-term profit for the company.

Other Objectives.

Other than the above objectives of the 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 increases.

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 manufacturers adjusts the price of the products. This strategy is also known as the market penetration objective. This strategy prevents a potential competitor from entering the market.

To survive: When a company faces a lack of demand for its product or overcapacity or facing fierce 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 with a key 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 wars between companies. Most of the time the companies will follow the price of the leader.