The Objectives of Pricing for Products and Services

Pricing objectives are the goals that guide an organisation in setting the cost of a product or service to existing or potential consumers. A pricing objective underpins the pricing process for a product. It should reflect the organisation's marketing, financial, strategic and product goals, consumer price expectations, and the available stock and production resources. Some examples of pricing objectives include:

• Maximising profits.

• Increasing sales volume.

• Matching competitors' prices.

• Deterring competitors.

• Survival.

Each pricing objective requires a different price-setting strategy to achieve an organisation’s pricing goals successfully. It requires the organisation to have an organisational understanding of its product attributes and the market in which the products sell. The choice of a pricing objective can last for a while. Adjusting a pricing objective may become necessary or appropriate as business and market conditions change.
 
Pricing objectives are selected with business and financial goals in mind. Elements of the business plan can guide the choice of a pricing objective and the strategies that go with it. Giving due consideration to an organisation’s mission statement and plans for the future, if one of the overall business goals is to become the market leader, an organisation needs to consider the quantity maximisation pricing objective instead of survival pricing.
 
If an organisation’s mission is to be a leader in their industry, it should consider a quality leadership pricing objective. On the other hand, profit margin maximisation may be most appropriate if an organisational plan calls for production growth in the short term since it will need funding for the relevant facilities and labour.
 
Some objectives, such as survival and price stability, will be used when market conditions are poor or shaky, when first entering a market, or when an organisation is experiencing hard times and needs to restructure. Examples to consider include:

• Pricing For Profit: this objective aims to make as much money as possible and maximise price for long-term profitability. Price has both a direct and indirect effect on profits. The direct impact relates to whether the price covers the cost of producing the product. Price also affects profit indirectly by influencing how many units might be sold. The number of products and services sold also influences profit through economies of scale, i.e., the relative benefit of selling more units.

• Profit Margin Maximisation: seeks to maximise the per-unit profit margin of a product. This objective is typically applied when the total number of units sold is expected towards the low end of the spectrum.

• Profit Maximisation: seeks to earn the greatest financial amount in profits. This objective is not necessarily tied to the aim of profit margin maximisation.

• Sales-Related Objectives: sales-oriented pricing objectives seek to increase volume or market share. A volume increase is measured against an organisation's sales across specific periods.

An organisation's market share measures its sales against competitors' sales in the industry. Volume and market share are independent, as a change in one doesn't necessarily activate a change in the other. The main sales-related pricing objectives include the following:

• Sales Growth: it is assumed that sales growth has a direct positive impact on profits, so pricing decisions are taken to raise sales volumes, and setting a price and altering or modifying policies are targeted to improve sales.

• Targeting Market Share: pricing decisions allow an organisation to achieve a targeted market share, defined as a specific volume of sales determined in the light of total sales in an industry. For example, an organisation may try to achieve a 25% market share in its relevant industry.

• Increase in Market Share: price and pricing are sometimes taken as tools to increase market share. When it is realised that a market share falls lower than expected, it can be raised by appropriate pricing. Pricing is aimed at improving market share.

Every organisation tries to react to its competitors with appropriate business strategies. Concerning the price, they may wish:

• To Face Up To The Competition: today’s markets are characterised by intense competition, and organisations set and modify their pricing policies to respond to their competitors. Many organisations use price as a powerful tool to react to the level and strength of competition.

• To Deter Competitors: preventing the entry of competitors can be one of the main pricing objectives. To achieve this objective, an organisation keeps its price as low as possible to minimise the profit attractiveness of products. In some cases, an organisation reacts offensively to prevent the entry of competitors by selling products at a loss.

• Signal Quality: buyers believe a high price is related to high quality. To create a quality or positive image in customers' minds that an organisation’s products are superior to those offered by close competitors, an organisation will design its prices accordingly.

• Market Penetration: this objective is concerned with entering deep into a market sector to attract the maximum number of customers. It calls for charging the lowest possible price to win price-sensitive buyers. A penetration strategy might be right for an organisation if the organisation is in a position to gain market share rapidly, bring down unit costs, and purposefully keep prices low to create barriers to entry.

• Skimming: this expression comes from the farming practice of milking cows, where the cream rises to the top from where it can be skimmed off. From a business perspective, this pricing objective is concerned with skimming maximum profit in the initial stage of a product's life cycle. Because the product is new, offering new and superior advantages, an organisation can charge a relatively high price because they are catering to customers with a higher willingness to pay to become early adopters. 

• Stabilising: this objective seeks to keep product prices in parity with the same or similar products offered by an organisation’s competitors to maintain and stablelise a level of profit generated from a particular product or to avoid starting a price war where no one wins. It is a tactical goal that encourages competition on factors other than price and focuses on maintaining market share.

• Survival: this is the most fundamental of all pricing objectives. Pricing is aimed at survival with hope for growth in the not-too-distant future. An organisation may use a survival-based pricing objective when it's willing to accept short-term losses for long-term viability.

It can be difficult to gauge the effectiveness of pricing strategies and objectives without a clear destination of where an organisation is or should be heading. Pricing objectives drive more than the  decision about how much profit should be made and are likely to be influenced by the goals and motivations of an organisations brand over time.
 
It is important to have a clear idea of what is important to an organisations financial results as its product and service pricing needs to reflect these. A definitive pricing objective is required to establish a goal path towards reaching the desired profitability, either through lead pricing or being a brand of value.
 
Pricing objectives are the indices that need to be set that drive how an organisations sets product or service pricing for both new and existing customers, in the direction provided by the pricing objectives over time in order to meet profitability and sales strategic target points.
 

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