Selecting the Pricing Objective

Setting the Price > Step 1: Selecting the Pricing Objective

The company first decides where it wants to position its market offering. The clearer a firm's objectives, the easier it is to set price.

The five major objectives are:

(a) Survival -

Companies pursue survival as their major objective when they are plagued with overcapacity, intense competition, or changing consumer wants. Survival is a short-run objective.

(b) Maximum Current Profit -
Many companies try to set a price that will maximise current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment.

(c) Maximum Market Share -
Some companies want to maximise their market share. The following conditions favour setting a low price:

(i) The market is highly price-sensitive, and a low price stimulates market growth.
(ii) Production and distribution costs fall with accumulated production experience.
(iii) A low price discourages actual and potential competition.
(d) Maximum Market Skimming - Companies unveiling a new technology favour setting high prices to maximise market skimming. This is also called market-skimming pricing, where prices start high and are slowly lowered over time. Market skimming makes sense under the following conditions:
(i) A sufficient number of buyers have a high current demand.
(ii) The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear.
(iii) The high initial price does not attract more competitors to the market.
(iv) The high price communicates the image of a superior product.

(e) Product-Quality Leadership -
A company might aim to be the product quality leader in the market. Many brands strive to be affordable luxuries‰·products or services characterised by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumer's reach.

(f) Other Objectives -
Non-profit and public organisations may have other pricing objectives. Whatever the specific objective, businesses that use price as a strategic tool will profit more than those who simply let costs or the market determine their pricing.