Pricing Decisions: Profit-Oriented, Sales & Status Quo
- 0:05 Profit-Orientation Pricing Objective
- 2:13 Sales-Orientation Pricing Objective
- 3:03 Competitor Pricing Orientation
- 3:46 Customer Pricing Orientation
- 4:14 Team Results
- 5:03 Lesson Summary
Companies need to determine the main objective of their pricing strategy. The different objectives can be based on profit, sales, competition or customers. The end result should be customer satisfaction.
Our Ninja Corporation is having a boardroom-level brawl. It seems the board of directors can't decide what the company's overall pricing objectives should be in relation to their marketing plan. We have four different teams of ninjas who each want to pursue their pricing objectives. Which team will win? Let's find out based on the rationale they provide on why their objective should be chosen.
Profit-Orientation Pricing Objective
The Ninja Corporation Team 1 is made up of the accounting and finance department. They believe that although all companies are in business to make a profit, there are specific ways that Ninja Corp can establish a profit-orientation pricing strategy. The group wants to concentrate on target profit pricing, maximizing profits and target return pricing.
Target profit pricing's ultimate goal is to reach a particular level of profit by using price to get sales that produce a certain profit per unit. In this manner, a specific price needs to be selected that will bring in sales but also maximize profits.
The second method for profit orientation is called maximizing profits. Albert the Accountant from Team 1 believes that using a maximization of profits strategy will help with overall profits. He has a specific mathematic model that he has used to predict sales and profits. The theory is that if a firm can create a mathematic model that captures all sales and profit information, then it should be able to identify a specific price that will maximize profits. The biggest issue with this model is that it is very hard to develop a working mathematic model. There will be a lot of pressure on Albert to make sure his model is accurate.
The third way Team 1 would like to use profit orientation is by using a target return pricing objective. Team 1 is obsessed with specific rates of profit and wants to use pricing strategies to get to measurable return on investment to placate stockholders. This method is most concerned with rates of return on investment.
Sales-Orientation Pricing Objective
Team 2 of Ninja Corp's board of directors consists of the VP of sales and division managers. They feel that the overall pricing objective should be based on using a sales orientation. This philosophy is based on the idea that increasing sales will provide a better financial position than increasing profits. Team 2 would like to cut costs on numerous products in order to achieve a bigger market share and more sales. They feel that the shareholders will be satisfied, and it will also lead to a large customer growth. Team 2 also has told the board that a higher market share gives the Ninja Corp sales force an upper hand in the market. They can request product displays, promotions and shelf space, and the retailers are happy to oblige to market-share leaders.
Competitor Pricing Orientation
Competitor pricing strategy is very common with companies such as airlines and supermarkets. The goal is to set prices based on their competition. Airlines also follow a type of competitor pricing called status quo, which means companies only change prices to meet competitors. For example, if Airline A drops prices by $100 on all East Coast flights, then Airline B will quickly match Airline A's prices.
Team 3 consists of the local store managers. They feel that in order to stay competitive, the products need to be priced below or at the competition. Team 3 wants to be able to have the flexibility to lower prices in reaction to a competitor's sale without upper management's approval.
Customer Pricing Orientation
Team 4 consists of the marketing department, and they strongly support utilizing a customer orientation strategy. This entails focusing on value and what the customer expects. If a company is known for high-end technology, then the price should be set as a premium with limited stock available. The company could also use a base price with no sales discount to communicate the overall value for a non-premium product.
After much debating and presenting, the pricing decision was made by the Ninja Corp board of directors. Ninja Corp's product line does have a large sales volume, but there was a general consensus to set up pricing decisions based on overall sales. The decision is to use a sales-oriented pricing objective. The input of the sales division carried enormous weight, and the importance of achieving the best market share in the category was impactful. In addition, Ninja Corp's board realized how important it is to be the leader in overall category market share. Leaders in market share have the biggest power with retailers and consumers, and the end result will be profit and success with shareholders. Most of all, the selection of this strategy shows that Ninja Corp's board is more concerned about moving product sales volume than just increasing rates of return or profits.
Lesson SummaryPricing strategies must be decided upon based on the overall pricing objective. Marketing managers can choose from a goal of profit, sales, competitor standing or customer perception. The pricing objective should bring a final result of profit, sales and customer satisfaction.
Chapters in Business 102: Principles of Marketing
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