In: Accounting
Pricing objectives are selected with the business and financial goals in mind. Elements of your business plan can guide your choices of a pricing objective and strategies.
Many pricing objectives are available for careful consideration. The one you select will guide your choice of pricing strategy.
1)Consider your business’s mission statement and plans for the future. If one of your overall business goals is to become a leader in terms of the market share that your product has, then you’ll want to consider the quantity maximization pricing objective as opposed to the survival pricing objective.
2)If your business mission is to be a leader in your industry, you may want to consider a quality leadership pricing objective
3)On the other hand, profit margin maximization may be the most appropriate pricing objective if your business plan calls for growth in production in the near future since you will need funding for facilities and labor.
4) Some objectives, such as partial cost recovery, survival, and status quo, will be used when market conditions are poor or unstable, when first entering a market, or when the business is experiencing hard times
The followingare the pricingobjectives
Partial cost recovery
Profit margin maximization.
Revenue maximization
Quality leadership
Quantity maximization.
Status quo
Survival.
Pricing Strategies
Certain strategies work well with certain objectives, so make sure you have taken your time selecting an objective. Careful selection of a pricing objective should lead you to the appropriate strategies.
Different pricing strategies can be used at different times to fit with changes in marketing strategies, market conditions, and product life cycles
If you’re working under a status quo pricing objective with competitive pricing as your strategy due to poor market conditions, and a year later you feel that the market has improved, you may wish to change to a profit margin maximization objective using a premium pricing strategy.
Competitive pricing—pricing your product(s) based on the prices your competitors have on the same product(s). This pricing strategy can be useful when differentiating your product from other products is difficult.
Product bundle pricing—used to group several items together for sale. This is a useful pricing strategy for complementary, overstock, or older products. Customers purchase the product they really want, but for a little extra they also receive one or more additional items. The advantage of this pricing strategy is the ability to get rid of overstock items. On the other hand, customers not wanting the extra items may decide not to purchase the bundle. This strategy is similar to product line pricing, except that the items being grouped together do not need to be complementary.
Loss leader—refers to products having low prices placed on them in an attempt to lure customers to the business and to make further purchases
Multiple pricing—seeks to get customers to purchase a product in greater quantities by offering a slight discount on the greater quantity. In the display of prices, a price for the purchase of just one item is displayed along with the price for a larger quantity
Good, better, best pricing—charges more for products that have received more attention (for example, in packaging or sorting). The same product is offered in three different formats, with the price for each level rising above that of the previous level
Optional product pricing—used to attempt to get customers to spend a little extra on the product by purchasing options or extra features
Penetration pricing—used to gain entry into a new market. The objective for employing penetration pricing is to attract and grow market share. Once desired levels for these objectives are reached, product prices are typically increased. Penetration prices will not garner the profit that you may want; therefore, this pricing strategy must be used strategically
Premium pricing—employed when the product you are selling is unique and of very high quality, but you only expect to sell a small amount. These attributes demand that a high, or premium, price be attached to the product. Buyers of such products typically view them as luxuries and have little or no price sensitivity. The advantage of this pricing strategy is that you can price high to recoup a large profit to make up for the small number of items being sold. To demonstrate
Product line pricing—used when a range of products or services complement each other and can be packaged together to reflect increasing value. This pricing strategy is similar to the multiple pricing strategy. However, rather than purchasing a greater quantity of one item, the customer is purchasing a different item or service at a higher price that is still perceived as a value when compared to the price for the individual product or service
Skim pricing—similar to premium pricing, calling for a high price to be placed on the product you are selling. However, with this strategy the price eventually will be lowered as competitors enter the market. This strategy is mostly used on products that are new and have few, if any, direct competitors when first entering the market