All decisions related to the elements of the marketing mix are critical to the survival of any business organization, including agricultural businesses. This is particularly relevant when determining the price to ask for a product or service. The task of pricing is repetitive because it takes place in a dynamic environment.
Shifting cost structures affect profitability, new competitors and products alter the competitive balance, and changing consumer tastes and disposable incomes modify established patterns of consumption. Given this, organizations must continually reassess their prices, as well as the processes and methods they use to arrive at those prices.
A logical starting point is for an organization to clearly articulate what objectives it seeks to achieve through its pricing policies and then to evaluate the factors likely to impact the strategies it seeks to adopt in pursuit of those objectives.
It is conventional practice for enterprises to have a hierarchy of objectives consistent with their vision and mission. At the top of this hierarchy are the corporate objectives, from which the organization’s marketing objectives are derived. Price is acknowledged as an element of the marketing mix, and therefore, pricing objectives are defined in terms of their role within the marketing mix strategy.
While pricing objectives vary from one firm to another, they can be classified into six major groups: profitability, volume, competitive, prestige, strategic, and relationship objectives.
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Profitability Objectives
Commercial enterprises and their management are assessed by their ability to produce acceptable profits. These profits may be measured in monetary values and/or as a percentage of sales and/or as a percentage of total capital employed.
In addition to the overall profitability of the organization, the profitability of Strategic Business Units (SBUs), product lines, and individual products are also monitored. The principal approach to ascertaining the point at which profits will be maximized is known as marginal analysis.
Therefore, prudent managers are likely to take the strategic view when making pricing decisions. Often, they will not necessarily seek to maximize profits in the short term at the expense of long-term objectives.
Volume Objectives
At times, the pricing decisions of managers are more concerned with sales maximization than profit maximization. In these cases, organizations set a minimum acceptable profit level and then seek to maximize sales, subject to this profit constraint.
This is common where, as a matter of policy, a company commits itself to mass marketing as opposed to serving narrow market segments. Minimum sales volumes can be more important than profit maximization in some situations.
For instance, agricultural machinery manufacturers may prioritize keeping production volumes high, even if it means sacrificing potential profits, to maintain their factories and skilled workforce. Another volume-related pricing objective is market share maximization. In this case, the organization’s specific goals may be either to maintain its share of a particular market or to increase it.
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Competitive Objectives
As with any other marketing decision, pricing decisions must take into account the current behavior of competitors and seek to anticipate their future actions. In particular, a company will want to anticipate competitors’ likely reactions if the pricing strategies and tactics it is considering are actually implemented.
In some cases, competing firms will sometimes set out to match the industry leader’s prices, in a development known as ‘going-rate pricing.’ The net result is to shift the focus away from price competition and refocus it on other elements of the marketing mix.
In other cases, a firm will price its products with the intention of discouraging competitors from entering the market or forcing them out. This is done by maintaining relatively low prices and profit margins.
Prestige Objectives
These are unrelated to profitability or volume objectives. Prestige objectives involve setting relatively high prices to develop and maintain an image of quality and exclusivity that appeals to status-conscious consumers. This reflects the recognition of the role of price in creating the image of an organization, its products, and its services.
Strategic Marketing Objectives
The objective of stabilizing prices is met in the same way as that of removing price as the basis of competition. That is, the company will seek to maintain its prices at or near those of competitors. However, the aim is not to negate price as a possible marketing advantage but to narrow the range of price differentials and fluctuations.
Also, pricing decisions are often focused on maximizing total profits rather than maximizing the profits of any single product within the portfolio. To achieve this, some products may be designated as loss leaders, with their price set at a level that produces low or even negative returns in order to boost the sales and profitability of other products in the range.
In this article, the processes of pricing decisions have been outlined. The article also covered the objectives behind pricing decisions made by businesses to foster profitability, volume, and competitive positioning.
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