Pricing Objectives: How Firms Decide on a Pricing Strategy
- 0:04 Price and Pricing Strategies
- 1:14 Profit-Oriented Pricing Objectives
- 2:03 Sales-Oriented Pricing Objectives
- 3:09 Status Quo Pricing Objectives
- 4:10 Lesson Summary
After watching this video, you should understand pricing strategy as it relates to the marketing mix. The three types of pricing strategies are profit-maximization, sales-oriented and status quo.
Price and Pricing Strategies
Our local farmer needs to come up with a pricing strategy for his certified organic product. You will have a chance to learn all about the pricing strategy choices that he can choose from for his marketing mix. Price is one of the four Ps that make up the marketing mix. The other Ps of the marketing mix are product, promotion and place.
A consumer must pay a price for a product or service, and price is what is given up in exchange to acquire a good or service. Price is very important to the marketer as well because it is the revenue that's acquired! Revenue is the price charged to customers multiplied by the number of units sold.
The biggest challenge facing a marketer is to figure out what price to charge. A higher price can communicate quality and prestige, while a lower price can communicate lower quality and cheapness, and how you balance the two all depends on the type of product. The three types of pricing strategies that the farmer can choose are profit-oriented maximization, sales-oriented pricing and status quo pricing.
Profit-Oriented Pricing Objectives
Profit-maximization pricing means setting prices so that total revenue is as large as possible relative to total costs. This is the prime pricing strategy to use if you are in a monopoly. The farmer is the only major farm in town selling certified organic produce, so maybe this would be an excellent option for him to use.
There are some other ways that the farmer can maximize profits. He can increase customer satisfaction, which can improve revenue, and he also can reduce costs. Some ways for the farmer to reduce costs would be to lay off employees and improve his product efficiency by minimizing loss of crops and implementing more effective mass distribution of his product line.
Sales-Oriented Pricing Objectives
Sales-oriented pricing objectives are based on either market share or unit/dollar sales. Market share is a company's product sales as a percentage of total sales for that industry, and it can be shown via revenue or units. For example, our farmer has 70% of the local organic produce market in revenue. The farmer can have an increase of market share to 80% as a company goal. He can achieve this through aggressive pricing to steal away his competition.
Instead of deciding to increase his market share, the farmer could also pursue a sales maximization strategy. The farmer would not be concerned with increasing market share but instead would be concerned with maximizing sales. This method means that the farmer would not worry about the competition, the market or even profits - just sales!! Large discounts can result in a huge increase in sales. The cash infusion philosophy should only be a short run objective since it can hurt profits in the long run because products are so heavily discounted.
Status Quo Pricing Objectives
Status quo pricing is a very conservative strategy since its objective is to maintain existing prices or meet competitors' prices. If there was another leader in certified organic produce, then our farmer might just match or copy their pricing structure. The farmer might send his manager to other local produce farmer markets in order to keep an eye on their pricing.
The farmer has decided on which pricing strategy would benefit his overall marketing mix. His choice is profit-oriented. He has chosen this strategy mainly due to the fact that he only has two other small competitors who do not offer the wide selection of his facility. The competition currently only makes up 30% of the market share. The farmer does realize that, for now, he has a monopoly on certified organic produce, but he needs to continue to monitor his competition. If his competitors start increasing their production and sales, then he might need to change his pricing strategy.
Pricing is the most flexible of the overall marketing mix because it can be increased or lowered at any time. Companies can choose from either profit-oriented, sales-oriented or status quo pricing strategies to market their products or services. The right strategy depends on market conditions, the competition and overall corporate philosophies. In the end, the pricing strategy the company chooses to follow today might need to be altered based on changes to sales, profits, revenues and competitive threats!
Chapters in Business 102: Principles of Marketing
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