Price is an integral part of a product. A product cannot exist without a price. Price affects demand. Price also affects even the economy of a nation as rapid price increases lead to galloping inflation.
Important objectives of Pricing
Pricing strategy begins with the determination of objectives. Pricing objectives reflect the overall goals a firm wants to accomplish through pricing. In international marketing, pricing objectives may vary, depending on a product life cycle stage and the country specific competitive situation. The important pricing objectives are discussed under the following headings:
- Market penetration
- Market skimming
- Market share
- Meeting competition
- Preventing potential competitors
- Early recoupment of the investment
- Quick cash recovery
- Discharging export obligation
- Disposal of surplus
- Return on investment; and
- Profit maximization
1. Market penetration: In penetration and pricing, price is used as a competitive weapon to gain market position. Penetrative pricing means a product may even be sold at a loss for a certain length of time. So, companies new to exporting cannot absorb such losses. A low price is charged in the initial period or until the product gains acceptance of the buyers. This method of pricing attracts buyers who are sensitive to price, effects large volume of sales, avoids competition and stabilizes the price.
2. Market skimming: In skimming, a high initial price is charged in a market segment which is willing to pay a premium price for a product. In skimming pricing, the product must create a high value for the buyers. This is often used in the introductory phase of the product life cycle when both production capacity and competition are limited. Sony used skimming strategy when it introduced Betamax video cassette recorders in the United States.
3. Market share: The efficiency of the product may be evaluated in terms of market share it holds. Increasing the market share is a sure way to lower costs. A larger market share might increase profitability because of greater economies of scale.
4. Meeting competition: The present market is highly competitive. When a product is introduced in a competitive market, meeting competition can be an important objective. The price must remain competitive in order to gain a competitive edge in the market.
5. Preventing potential competition: The objective of pricing may be to prevent the entry of new competitors into the market. When a low price is set on the product, the marketer may incur loss. This discourages the competitors to gain an entry into the market with similar product.
6. Early recoupment of investment: Some products may have short product life cycle. They may also be affected by swift technological changes. There may also be potential danger of political threats and cut throat competition. In such a situation, the marketer may have the objective of recouping his investment as early as possible. Prices bring revenue to the firm. A high price determined in the initial period may help the manufacturer recoup the investment in the project early.
7. Quick cash recovery: When a firm has liquidity problem, it may prefer to generate quick cash flow. The pricing method adopted by it may liquidate the stock quickly thereby encouraging channel members and buyers to make prompt payment.
8. Discharging export obligation: Having gained a good market share in the domestic market, the firm may be willing to foray into foreign market. Entering foreign market and meeting export obligation may not be easy for all firms. Sometimes, even by charging a price lower than the cost, the firm gains a share in the foreign market.
9. Disposal of surplus: When a firm has surplus stock, it may resort to dumping. Dumping is an important global pricing strategy. It is the sale of an imported product at a price lower than that is normally charged in a domestic market or country of origin. The firm views export sales as passive contribution to sales volume.
10. Return on Investment: Price is the only source of revenue to the firm. The firm has to earn sufficient revenue in order to meet the needs of stakeholders. It may set a target rate of return on its investment. Pricing serves to secure the target rate of return on the investment.
11. Profit maximization: Profit is by far the most important pricing objective. Prices are viewed as active instrument for profit maximization. In general, pricing is a tool of accomplishing marketing objectives. The firm may use price to achieve a specific objective, whether a targeted rate of return on profit, a targeted market share or some other specific goal.