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Pricing Process: Concept of Product Pricing & Pricing Objectives

Pricing is the process of determining the value received in exchange for products and services, and is crucial for generating revenue. An organization's pricing decisions directly impact its success. Prices are influenced by factors like costs, competition, market conditions, and quality. Organizations use pricing strategies and methods to set prices that cover costs and earn profits. Common objectives for pricing include maximizing profits, achieving target returns, increasing sales volumes, maintaining market share, stabilizing prices, meeting competition, and setting prices according to consumer purchasing power. Pricing objectives play an important role in an organization's overall growth and success.

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Simran Soni
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397 views2 pages

Pricing Process: Concept of Product Pricing & Pricing Objectives

Pricing is the process of determining the value received in exchange for products and services, and is crucial for generating revenue. An organization's pricing decisions directly impact its success. Prices are influenced by factors like costs, competition, market conditions, and quality. Organizations use pricing strategies and methods to set prices that cover costs and earn profits. Common objectives for pricing include maximizing profits, achieving target returns, increasing sales volumes, maintaining market share, stabilizing prices, meeting competition, and setting prices according to consumer purchasing power. Pricing objectives play an important role in an organization's overall growth and success.

Uploaded by

Simran Soni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Pricing Process: Concept of Product Pricing & Pricing Objectives

Pricing can be defined as a process of determining the value that is received by an organization in
exchange of its products or services.

It acts as a crucial element of generating revenue for an organization.


Therefore, the pricing decisions of an organization have a direct impact on its success.
The price of a product is influenced by a number of factors, such as manufacturing cost, competition, market
conditions, and quality of the product. An organization, while setting the prices of its products, needs to ensure that
prices must cover costs incurred for producing products and profit margins. If the price of a product does not cover
costs, then financial resources of the organization would exhaust, which would ultimately result in the failure of
business.

An organization uses a number of methods and strategies to determine the prices of its products. In economic terms,
an efficient pricing strategy is the one that aims at gaining consumer surplus to the producer. The pricing strategy of
an organization should be realistic, flexible, and profitable.

Moreover, it should be focused on achieving the financial goals of an organization. Some of the most common
pricing strategies used by an organization include differential pricing, promotional pricing, product line pricing, and
psychological pricing.

Concept of Product Pricing:


Setting prices as per the level where marginal revenue is equal to marginal cost is called marginality rule. However,
there is evidence produced by some researchers that most of the organizations do not follow marginality rules
rather they follow different pricing methods and strategies based on different market conditions. Pricing decisions
play an important role in an organization since they help in generating revenue.
Pricing contributes to the success or failure of the organization’s marketing strategy. Price is also called a demand
regulator. Setting the prices involves a deep understanding of factors that affect the marketing environment. Every
organization sets the prices of its products for fulfilling various objectives.

Figure1 shows the three types of pricing objectives:

1
Let us discuss the three types of pricing objectives (as shown in Figure1) in brief:
I. Profit oriented, Objectives: Include the following objectives:
a) Maximizing Profit:
It implies that prices are set in such a way that they help in achieving maximum profit. According to Stanton, Etzel
and Walker, “The pricing objective of making as much money as possible is probably followed more than any other
goal.” Profit maximization is more beneficial in the long run as compared to short run. For instance, an organization
selling a new product tries to build a customer base by selling the product at low prices in the short run. This helps
the organization to gain profit in the long run by winning loyal customers.
b) Achieving a Target Return:
It refers to earn an adequate rate of return on the investment done by an organization in manufacturing a product.
The main focus of marketers is on maintaining a specific return on sales or investment. This is done by adding extra
cost to the product for earning a desired profit.

II. Sales oriented, Objectives: Include the following objectives:


a) Increasing the sales volume:
It implies sales expansion by giving discounts to customers. In the short run, an organization might be ready to bear
losses by reducing the prices to increase the sales volume. For instance the hotel industry faces low demand during
off–season; Therefore, it prefers to decrease its prices and offers discounts to increase sales.
b) Increasing or maintaining market share:
It plays a crucial role in the success of an organization. The organization tries to gain market share by lowering down
the prices as compared to its competitors.

III. Status quo oriented, Objectives: Includes the following objectives:


a) Stabilizing the Prices:
It prevents price wars between competitors. The prices are stabilized in those industries where product is
standardized in nature. The stabilization of the prices helps in maintaining the demand and reducing competitive
threats.
b) Meeting the Competition:
It implies that the changes made in the price of a product help an organization to gain competitive advantage.
Sometimes, the organization also tries to neutralize competitive pressures by price movement.
c) Determining prices according to consumer’s paying capacity:
It implies that the purchasing power of the consumers should be taken into consideration while setting prices. The
sales of an organization depend entirely upon the purchasing power of consumers.

An organization also adopts pricing objectives to promote developmental activities in the society. For instance, an
organization may reduce the prices of a product for the low income sections of the society. Thus, the pricing
objectives play a significant role in the overall growth of the organization.
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