What pricing approach do I need to reach my business objective?
Pricing objectives can vary from one organisation to another. It depends on many factors, such as the activity of the organisation, size, and resources available. In this article, you can find a brief guideline to the various types of pricing objectives you may have, and how they support the pricing decisions you make.
1. Maximise Profit
Profit maximization is a common target of many businesses. All the decisions with respect to new projects, acquisition of assets, raising capital, distributing dividends, etc are studied for their impact on profits and profitability. When it comes to pricing, it is important for companies with this objective to be confident they are achieving the best margin possible To achieve this, a combination of pricing strategies may be adopted and an appropriate pricing tool will likely be required in order to support the testing and analysis of each pricing decision, so there is a continual review of the success of each decision.
2. Maximise Revenue
Revenue maximization is an alternative business target. The objective of seeking revenue maximization is to maximize total sales. This approach is commonly used to give the impression of growth to shareholders. For example, a company may choose a loss leader pricing strategy, by selling a product or service at break-even point of below cost to stimulate other profitable sales.
3. Maximise Quantity
This objective seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs. For instance, time-based pricing utilises the power of technology to dynamically update prices based on a customer’s willingness to pay against market forces such as availability.
4. Maximise Profit Margin
Profit margins are the amounts that companies make beyond what it costs to create goods or services, such as costs of goods sold, production costs, inventory costs, and similar expenses. A high-profit margin indicates high profitability for the business, although what constitutes a good margin varies by industry. Many firms, in a desire to make themselves appear profitable in the long term, choose to focus intensely on maximizing profit margins.
5. Quality Leadership
If a company chooses a quality leadership objective, it aims to provide the best quality product in the market, and therefore can typically charge more for its goods or services than competitors. These companies are usually market leaders. One of these pricing strategies could be value-based pricing.
6. Partial Cost Recovery
In some scenarios, companies have other sources of revenue, that can help to make partial cost recovery. Skill councils, for example, are government funded in part, and may provide training courses for companies that are partly subsidised/partly funded by attendees. Therefore a lower price can be charged to the end consumer.
7. Survival
In the situations of market decline or overcapacity, the aim may be to select a price that will cover all costs and permit the company to remain in the market. In this case, survival may take priority over profits, so this objective may be considered as temporary. Absorption pricing is one way to cover all costs, including variable costs as well as fixed costs. For example, Marked oriented pricing is where analysis and research of the market is completed, and prices are set dependent on these results. For example, having a pricing strategy that matches the prices of your competitors.
8. Status Quo
This objective seeks to have stable prices in order to avoid price wars and to have moderate but stable profits. Value-based pricing can be seen as an example of stable pricing.
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