This article will teach you the meaning of price, pricing, and pricing objectives. It will help you decide the future pricing policies for your business.
Price is the amount of money charged for a product or service or the sum of the values consumers exchange for the benefits of having or using the product or service. Price is the only service element in the marketing mix that produces revenue, while all other aspects represent cost.
Meaning of Price
The term ‘price’ denotes money value of goods & services in terms of money. The term price indicates the monetary value of a product. It represents the amount of money for a buyer to exchange a product.
In other words, the price represents the money the buyer pays the seller for a product. Thus, we may define price as the amount the seller charges to a buyer for a product and its accompanying services.
Components of Price
The price of the product has three components.
1. Original Cost
Original cost refers to the cost of materials, labor expenses, and other direct expenses incurred to produce a product.
2. Selling Cost
For making the product saleable, the expense incurred on the packaging, transportation, storage, advertising, and sales promotion are selling costs. In modern times, selling costs include the following payments:
i) Service Expenses
Service Expenses should treat differently because these are helpful when the product is in production. Service expenses are a part of the price. These expenses include a warranty, face repair & services, free home delivery, training, etc.
ii) Marketing Expenses
The expenses incurred on making the product ready as per customers’ requirements and on satisfying their necessities are called marketing expenses. These expenses include advertisement, sales promotion, demonstrations, and marketing campaigns.
iii) Administration Expenses
Several expenses incurred for the administration of business, like office expenses, legal expenses, depreciation, provision for bad debt, etc., are included in it.
3. Profit Margins
Every business is for earning profit. Therefore, a certain percentage of the profit margin includes a product’s price.
Meaning of Pricing
Pricing is the art of translating the value of the product or service. The marketing manager targets the consumers for sale before deciding the price. It is the process of setting pricing objectives, identifying the factors governing the price, formulating the pricing policies, setting the price, implementing them, and controlling them.
Pricing objectives provide a basis for formulating pricing policies and strategies and setting the actual price. The pricing objective should be consistent with the internal organizational atmosphere and compatible with the external environment. They should aim at achieving the firm’s objectives. Pricing objectives of individual firms in an industry usually differ depending upon the variation in their overall organizational goals.
The important pricing objectives followed by various firms are as under:
Survival is the most fundamental objective in most cases. Most organizations tolerate short-term losses if these are necessary to continue existence. From fixing low prices of the products during the crisis, survival is a short-term objective. Once the firm’s position improves, it shifts to other pricing objectives.
2. Target Return on Investment
It is a common objective of well-established and reputed firms in the market to fix a specific rate of return on investment. The marketer may set different target returns for other products, but such returns should be related to a single overall target return rate. These objectives of pricing lead to cost-plus pricing.
3. Profit Maximization
The firm should aim to maximize profit on total output as pricing objectives. It can be a long-term objective because, at the early stages of the product life cycle, there is a minimum market share/sales volume possible with a lower price & lower margin. A manufacturer may maximize profits by pricing certain products at a low price to attract Customs’ attention.
4. Price Stability
Many firms have the objective of price stabilization. There is a price leader in industries. The price leader tries to maintain the stability of his pricing. Price stability helps in planned and regular production in the long run as pricing objectives. To stabilize prices, many manufacturers follow their dealers’ resale price maintenance policy.
5. Market Share
Market Share means a portion of the industry sale a firm desires to achieve. When the market has growth potential, market share is a better indicator of growth. A firm might be earning a reasonable return rate, but its market share may be decreasing. The firm may lower prices than competitors to capture the market. Capturing market share is the objectives of pricing.
6. Meet or Prevent Competition
Price can use as a tool to compete with or surpass the competition. Meeting competition implies keeping the exact costs as fixed by the competitors. Sometimes, companies price their products below the competitors’ price to fight the match and discourage the entry of new competitors. Such a policy is more successful if the competitor has a higher cost. As such, he cannot lower the price to the objectives of pricing.
7. Public Image
A Company’s image is more important to its success. When a company comes into existence, it develops a particular impression in people’s minds regarding product quality, package, brand name, etc. A company with a sound reputation may price the products according to its choice. Hence, maintaining an Image in public may be considered a pricing objective.
8. Cash Recovery
Some businesses may set their pricing goals to promote cash sales. As a result, they set the pricing for their goods to encourage customers to pay cash. Sales prices are kept low for money, and sales prices are kept high for credit. Cash recovery is one of the main objectives of pricing.
9. Skimming the Market Cream
If the objective of a firm is to skim the market cream, it will fix high prices to earn maximum profit. The policy can succeed only in the absence of any competitor. The prices decrease when any competitor enters the market.
10. Market Penetration
Suppose the firm’s objective is to restrict the entry of new firms into the market. It adopts a marked penetration objective. The manufacturers keep the product price lower to capture the maximum demand and discourage competitors from entering the market. The cost of production & distribution reduces when the production increases. But this objective is only possible when the market is price sensitive.
11. Other Objectives
Besides the above pricing objectives, there may be some other pricing objectives, such as:
i) Product-line promotion
ii) More margin to Middleman
iii) Social & ethical consideration
iv) Expansion of business
v) Customer’s ability to pay etc.
What is Pricing Objective Example?
A pricing objective is a goal that a company sets for its pricing strategy. For example, a company may set a pricing objective to maximize profits, to increase market share, to increase sales, or to attract new customers. Also, price will provide customer value to the marketer.
What are the main Pricing Objectives?
The main objectives of pricing are as follows:
1. To maximize profits.
2. It helps in increasing market share.
3. To increase sales volume.
4. Prices are stabilized by setting a perfect price.
What are the 5 C’s of Pricing?
The 5 C’s of pricing are: