Achieving Marketing Objectives
If a firm has clear objectives it is easier for it to set its price to achieve those objectives.
- Establish marketing objectives:
- Survival: if firm is plagued with over-capacity, intense competition, or changing consumer wants. Prices are lowered to ensure inventory turnover but price must cover variable costs & fixed costs. This is only a short-run objective
- Maximum current profit: price is set to maximize current profit, cash flow, or ROI. Problem is that this method depends on demand & cost functions which are hard to estimate. Long-run performance may be neglected with this method.
- Maximum current revenue: firm tries to maximize revenue, this requires estimating demand.
- maximum sales growth (market penetration pricing): low price is set assuming that market is price sensitive. Goal is high sales volume. Method works well if production & distribution costs fall with increased production & low price discourages competition.
- Maximum market skimming: firms sets a high price to “skim” the market. Method works when there is high demand, unit costs are not too high for small volumes of production, the initial high price does not attract competitors, & the high price communicates a superior product image.
- Product-Quality leadership: firm prices the product higher than competitors due to quality built into product
- Determine Demand: estimate probable quantify that will be sold at each price & determine price elasticity of your good.
- Estimating Costs
- Analyzing Competitor’s costs, prices, & offers: The firm should benchmark its price against competitors, learn about the quality of competitors offering, & learn about competitor’s costs.
- Selecting a pricing method
- Markup pricing: a 20% markup
- Target return pricing: this is based on ROI
- Perceived-value pricing: buyers perception of the product is key, not cost so what is the product worth to consumer sets the price.
- Value pricing: more for less philosophy
- Going rate pricing; charge what everyone else is
- Sealed bid pricing: companies bid prices to get a job
- Select final price: the firm must consider the following when selecting its final price.
- Psychological pricing such as a $100 dollar bottle of perfume sells better than a $10 bottle. Also $299 is considered in the $200 range not the $300.
- Advertising & brand quality must be examined
- Price must be acceptable to distributors, dealers, salesforce, competitors, suppliers, & the government.
Price must cover variable & fixed costs & as production increases costs may decrease. The firm gains experience, obtains raw materials at lower prices, etc., so costs should be estimated at different production levels. Firms must also analyze activity-based cost accounting (ABC) instead of standard cost accounting. ABC takes into account the costs of serving different retailers as the needs of differ from retailer to retailer. Also the firm may attempt Target Costing (TG). TG is when a firm estimates a new product’s desired functions & determines the price that it could be sold at. From this price the desired profit margin is calculated. Now the firm knows how much it can spend on production whether it be engineering, design, or sales but the costs now have a target range. The goal is to get the costs into the target range.
After price is set consider the following:
- Geographical pricing: set price in different regions, countries, etc. Also how will company get paid; barter, buyback arrangement, compensation of cash & products, or an offset (company receives cash but agrees to spend majority of the money in that country in a stated time period).
- Price discounts & allowances: Quantify, seasonal, trade discounts
- Promotional pricing: cash rebates, special event pricing, low interest financing
- Discriminatory pricing: different prices for different customer segments (senior citizens, students); different product forms: trial size; image pricing; location: tickets for different seating at a concert; time: costs less to call on Sunday
- Product Mix pricing
- Product line pricing: autos come in stripped down models or with options
- Captive-product pricing: razor blades, inkjet cartridges
- Two part pricing: phone company charges monthly service fee plus long distance charges
- By-product pricing: Zoo’s sell manure, so with additional revenue price may be lower
- Product bundling: auto makers offer a bundle of options at a lower price than if each option was purchased separately.
If a firm is considering a price cut/increase it must consider the reactions from competitors, suppliers, customers, the govt. etc. Companies must also monitor competitor price changes. In the case of rising costs a company must decide whether to increase price or reduce amount sold