Common Pricing Objectives
Not surprising, product pricing has a big effect on company objectives. Pricing can be used strategically to adjust performance to meet revenue or profit objectives. Pricing can also have unintended or adverse effects on a company’s objectives. Product pricing will impact each of the objectives below:
- Increase net profit in 2016 by 5 percent. (Profit objective)
- Capture 30 percent market share in the product category. (Competitive objective)
- Increase customer retention. (Customer objective)
Of course, over the long run, no company can really say, “We don’t care about profits. We are pricing to beat competitors.” Nor can the company focus only on profits and ignore how it delivers customer value. For this reason, marketers talk about a company’s orientation in pricing. Orientation describes the relative importance of one factor compared to the others.
All companies must consider customer value in pricing, but some have an orientation toward profit. We would call this profit-oriented pricing.
profit-oriented pricing
Profit-oriented pricing places an emphasis on the business making a profit. In profit-oriented pricing, the price per product is set higher than the total cost of producing and selling each product to ensure that the company makes a profit on each sale.
The benefit of profit-oriented pricing is obvious: the company is guaranteed a profit on every sale. There are real risks to this strategy, though. If a competitor has lower costs, then it can easily undercut the pricing and steal market share. Even if a competitor does not have lower costs, it might choose a more aggressive pricing strategy to gain momentum in the market. Customers don’t really care about the company’s costs. Price is a component of the value equation, but if the product fails to deliver value, it will be difficult to generate sales.
Also, profit-oriented pricing is often a difficult strategy for marketers to succeed with because it limits flexibility. If the price is too high, then the marketer has to adjust other aspects of the marketing mix to create more value. If the marketer invests in the other three Ps—by, say, making improvements to the product, increasing promotion, or adding distribution channels—that investment will probably require additional budget, which will further raise the price.
It’s fairly standard for retailers to use some profit-oriented pricing—applying a standard mark-up over wholesale prices for products, for instance—but that’s rarely their only strategy. Successful retailers will also adjust pricing for some or all products in order to increase the value they provide to customers.
competitor-oriented pricing
A competitor-oriented pricing strategy copies the competitor’s pricing strategy or seeks to use price as one of the features that differentiates the product. That could mean either pricing the product higher than competitive products, to indicate that the firm believes it to provide greater value, or lower than competitive products in order to be a low-price solution.
This is a fairly simple way to price, especially with products whose pricing information is easily collected and compared. Like profit-oriented pricing, it carries some risks, though. Competitor-oriented pricing doesn’t fully take into account the value of the product to the customer compared to the value of competitive products. As a result, the product might be priced too low or high for the value it provides.
customer-oriented pricing
Customer-oriented pricing, also referred to as value-oriented pricing, looks at the price-value equation and seeks to charge the highest price that supports the value received by the customer.
Given the importance of the customer in a marketing orientation, it will come as no surprise that customer-oriented pricing is the recommended pricing approach because its focus is on providing value to the customer.
Customer-oriented pricing requires an analysis of the customer and the market. The company must understand the customer, the value that the customer is seeking, and the degree to which the product meets the customer’s need. The market analysis shows competitive pricing but also pricing for substitutes.