Chapter 8: Pricing Concepts and Strategies
Pricing Objectives
Pricing objectives are goals that companies set to determine how they price their products or services. These goals guide how a company approaches the market and ensures they achieve specific outcomes, such as making a profit or attracting customers. Understanding pricing objectives is crucial because pricing directly affects a company's revenue and profitability. Here are some common pricing objectives with examples from real-life businesses to help you understand how they work.
Profit Maximization
One of the most common pricing objectives is profit maximization. This goal focuses on setting prices to achieve the highest possible profit. Companies analyze their costs and then set a price that will provide the maximum margin between their costs and the selling price.
Example: Apple Inc. is known for its profit maximization strategy. When Apple releases a new iPhone, it sets a high price point because it knows customers are willing to pay a premium for the latest technology. This strategy helps Apple maximize its profits on each unit sold.
Sales Volume Maximization
Sales volume maximization aims to increase the number of units sold, even if it means lower profits per unit. This objective is often used to gain market share, increase brand awareness, or clear out old inventory. Companies may use discounts, promotions, or lower prices to achieve this goal.
Example: Walmart follows a sales volume maximization strategy with its “Everyday Low Prices” approach. By keeping prices low, Walmart attracts a large number of customers, increasing its sales volume significantly. This strategy helps Walmart become a dominant player in the retail market.
Market Penetration
Market penetration pricing is used when a company wants to enter a new market or increase its share in an existing market. The objective is to set a low price to attract customers quickly. This can help the company build a customer base and deter competitors.
Example: Netflix used market penetration pricing when it first launched its streaming service. By offering a low monthly subscription fee, Netflix quickly attracted a large number of subscribers. This strategy helped Netflix establish itself as a leader in the streaming industry.
Market Skimming
Market skimming involves setting a high price initially and then gradually lowering it over time. This objective is often used for new and innovative products. The high price attracts early adopters who are willing to pay more for the latest technology or product. Once this market is saturated, the company lowers the price to attract more price-sensitive customers.
Example: When Sony releases a new PlayStation console, it often uses market skimming. The initial high price targets gamers who are eager to have the latest gaming technology. Over time, Sony reduces the price to appeal to a broader audience.
Survival
Survival pricing is used in tough economic times or highly competitive markets. The main goal is to cover costs and keep the business running, even if profits are minimal. This might involve setting lower prices to maintain enough cash flow to stay afloat.
Example: During economic recessions, many small businesses adopt survival pricing to keep customers coming in. For instance, a local restaurant might offer discounted meals to ensure they have enough sales to cover rent and wages.
Social Responsibility
Some companies set pricing objectives based on social responsibility, aiming to provide affordable products or services for the greater good. This can involve setting lower prices to ensure accessibility for a broader segment of the population.
Example: TOMS Shoes operates with a social responsibility pricing objective. For every pair of shoes sold, TOMS donates a pair to a person in need. This pricing strategy balances making a profit with contributing to social causes.
Prestige Pricing
Prestige pricing, also known as premium pricing, sets high prices to create a perception of quality and exclusivity. This objective is used to position a product as a luxury item and attract customers who associate high prices with superior quality.
Example: Rolex watches use prestige pricing. By setting high prices, Rolex creates an image of exclusivity and high quality, appealing to customers who want to own a luxury timepiece.
Cost-Based Pricing
Cost-based pricing involves setting prices based on the cost of producing the product plus a desired profit margin. This objective ensures that all costs are covered and a consistent profit is achieved.
Example: A local bakery might use cost-based pricing. They calculate the cost of ingredients, labor, and overhead, then add a profit margin to determine the price of their baked goods.
Conclusion
Understanding these different pricing objectives helps companies choose the right strategy to achieve their business goals. Whether a company aims to maximize profit, increase sales volume, penetrate a new market, or uphold social responsibility, the chosen pricing objective plays a critical role in shaping its pricing strategy. By studying real-life examples, students can see how these objectives are applied in various industries and learn how to develop effective pricing strategies for future business endeavors.
