Pricing

Price is the only marketing mix variable or part of the offering that generates revenue. Firms must have prices that are consistent with their products, promotions, and distribution strategies. The price, product, promotion and placement of a good or service must convey a consistent image.

The Pricing Framework

Before setting the price for an offering, a firm must determine its pricing objective or what it wants to accomplish with its pricing. It must also estimate demand, determine costs, and analyze all factors affecting pricing decisions.

The Firm's Pricing Objectives

Common pricing objectives include:

Earning a Targeted Return on Investment (ROI)

  1. ROI is the amount of profit an organization hopes to make given the amount of assets or money it has tied up in a product.  
  2. Common pricing objective.
  3. Expressed as a percentage.
  4. Example - If a company has $100,000 invested in a product, and is expecting a 10% ROI, it would want the product's profit to be $10,000.

Maximizing Profits

  1. Many companies want to increase revenues as much as possible relative to costs. To do this, they focus on lowering costs or implementing programs to encourage customer loyalty.
  2. Examples of cost-cutting measures include controlling inventory, reducing real estate holdings, cutting jobs, reducing marketing and advertising expenses, etc.
  3. Raising prices to maximize profits may work in the short-term as long as the offering is perceived to have value relative to its price.

Maximizing Sales

  1. Maximizing sales involves pricing products to generate as much revenue as possible, regardless of what it does to a firm's profits.
  2. Possible ways to maximize sales in the short-term: selling off inventory or cutting prices temporarily.
  3. Typically a short-term objective since profitability is not considered.

Maximizing Market Share

  1. By capturing a maximum amount of market share, a firm expects to earn higher profits, although that isn't always the case.
  2. Many companies feel they have to maximize market share in order to be viewed as strong competitors in their respective industries.

Maintaining the Status Quo

  1. A firm may have the objective of maintaining the status quo; meeting or equaling their competitors' prices.
  2. Airlines are good examples of industries where the members maintain the status quo.

 


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