pricing objectives to survive in today’s highly competitive marketplace, firms need pricing...
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Pricing ObjectivesPricing Objectives
To survive in today’s highly competitive marketplace, firms need pricing objectives that are specific, attainable and measurable. Realistic pricing goals then require periodic monitoring to determine the effectiveness of the firm’s strategy. Pricing objectives can be divided into three categories:1.Profit-orientated pricing objectives2.Sales oriented objectives3.Status-quo objectives
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Profit-orientated Pricing Profit-orientated Pricing ObjectivesObjectives
Profit-orientated objectives include
1.Profit Maximisation
2.Satisfactory Profits, and
3.Target return on Investment.
1.Profit Maximisation as pricing objective Profit Maximisation means setting prices so that total revenue is as large
as possible relative to total costs. Profit maximisation does not always significantly unreasonably use high
prices. Both price and profits depend on the type of competitive environment a firm faces, such as being in a monopoly position (being the only seller) or selling in a much more competitive situation. (Review four types of competitive environments:- Monopoly, Monopolistic Competition, Oligopoly, Pure Competition)
Note: Firms cannot charge a price higher the product’s perceived value.
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Profit-orientated Pricing Profit-orientated Pricing ObjectivesObjectives
2. Satisfactory profits as pricing objective Satisfactory profits are a reasonable level of profits. Rather than maximising profits, many firms strive for profits that are
satisfactory to shareholders and management – in other words a level of profits consistent with the level of profits consistent with the level of risk the firm faces.
In risky industry (e.g. micro-lending), a satisfactory profit may be 35 per cent. In a low-risk industry it might be 7 per cent.
3.Target return on investment as pricing objectives The most common profit objective is target return on investment
(ROI), sometimes called the firm’s return on total assets. ROI measures the overall effectiveness of management in generating
profits with its available assets. The higher the firm’s return on investment, the better off the firm is. Many use target return on investment as the main pricing goal.. E.g. Amalgamated Beverages Industries, the marketers of Coca-Cola in South Africa, has as an objective an average annual rate of return on equity that exceeds 20 percent.
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Profit-orientated Pricing Profit-orientated Pricing ObjectivesObjectivesReturn on investment (ROI) is calculated as follows:
Return on investment = Net profit after taxes
Total Assets
Assume that in 2014 Victori’s Cosmetics had assets of N$ 4,5 million, net profits of N$ 550 000, and a target ROI of 10 per cent. Calculate the actual and comment on the result.
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Profit-orientated Pricing Profit-orientated Pricing ObjectivesObjectivesReturn on investment (ROI) for Victori’s Cosmetics is calculated as follows:
Return on investment = Net profit after taxes
Total Assets
Return on investment (ROI) = 550 000 x 100
4 500 000
= 12,2 per cent
The ROI for Victori’s Cosmetics in 2014 exceeded its target of 10 percent by 2,2 percent which indicates that the firm prospered in 2014.
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Profit-orientated Pricing Profit-orientated Pricing ObjectivesObjectives
3. Target return on investment as pricing objectives, cont….. Most major pharmaceutical firms strive for a 20
percent ROI. In some industries, such as the grocery industry, a return of under 5 percent is common and acceptable. Clicks, for example, manages profit margins of only 5.4 per cent.
A frim with target ROI can predetermine its desired level of profitability. The marketing manager can use the standard, such as 10 percent ROI, to determine whether a particular price and marketing mix are feasible. In addition the manager must weigh the risk of a given strategy even if the return is the acceptable range.
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Sales-orientated Pricing Sales-orientated Pricing ObjectivesObjectives
Sales-orientated are based either on market share or on Dollar (N$) values or unit sales. The effective marketing manager should be familiar with these pricing objectives.
Market Share Market share is a firm’s product sales as a percentage for that industry.
For example Tiger Brands is a company that offers generous trading terms to retailers and combine that with price discounting in product categories such as maize meal (Ace), dog food (Dogmor), and tomato sauce (All Gold) to ‘buy’ market share.
Sales can be reported in rand/N$ values or in units of product. NB: It is important to know whether market share is expressed in revenue or units, because the results may be different. Consider, for example, four firms competing in an industry with 2 000 000 total unit sales and total industry revenue of R 4 million. Consider the table in the next slide and complete it by calculating the missing figures. Comment on you findings.
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Sales-orientated Pricing Sales-orientated Pricing ObjectivesObjectives
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Company
Units Sold
Unit price
(R/N$)
Total Revenue (R/N$)
Unit market share (%)
Revenue market share (%)
A 1 000 000
1.00 ? ? ?
B 200 000
4.00 ? ? ?
C 500 000
2.00 ? ? ?
D 300 000
4.00 ? ? ?
Total ? ? ? ? ?
Sales-orientated Pricing Sales-orientated Pricing ObjectivesObjectives
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Company
Units Sold
Unit price
(R/N$)
Total Revenue (R/N$)
Unit market share (%)
Revenue market share (%)
A 1 000 000
1.00 1 000 000
50 25
B 200 000
4.00 800 000 10 20
C 500 000
2.00 1 000 000
25 25
D 300 000
4.00 1 200 000
15 30
Total 2 000 000
4 000 000
100 100Firm A has the largest unit market share at 50 per cent, but it has only 25 per cent of the revenue market share. In contrast, firm D has only a 15 percent unit share but the largest revenue share: 30 percent. Usually, market share is expressed in terms of revenue and not units
Sales-orientated Pricing Sales-orientated Pricing ObjectivesObjectives
Further Comments on Market Share Many firms believe that maintaining or increasing market
share is an indicator of the effectiveness of their marketing mix.
Larger market shares have indeed often meant higher profits, thanks to greater economies of scale, market power, and ability to compensate top-quality management.
For example South African Airways aggressively cut its fares towards end of 1998 to win back its market share it lost to Comair, Sun Air and Nationwide during the year.
Conventional wisdom also says that market share and return on investment are strongly related. (for the most part they are!)
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Sales-orientated Pricing Sales-orientated Pricing ObjectivesObjectivesSales maximisation as pricing objectives Rather striving for market share, some firms try to maximise sales The objective of maximising sales ignores profits, competition,
and the marketing environment as long as sales are rising. If a firm is strapped for funds or faces an uncertain future, it may
try to generate a maximum amount of cash in the short run. Management’s task when using this objective is to calculate which
price-quantity relationship generates the greatest cash revenue. Sales maximisation can also be effectively used on a transport
basis to sell off excess inventory.
NB: Maximisation of cash should, however, never be a long-run objective, because cash maximisation may mean little or no profitability. Without profits, no firm can survive.
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It is not uncommon, for example, to find Christmas cards, surf boards, and Weber braais discounted at 50 to 70 per cent off retail prices after the holiday season. In addition, management can use sales maximisation for year-end sales to clear out old models before introducing the new ones. Computer software firms and motor vehicle manufacturers use this strategy regularly. The prices of DVDs are already dropping as new technologies becomes accepted (Concept of Disruptive technologies).
Status-quo Pricing ObjectivesStatus-quo Pricing Objectives Status-quo pricing seeks to maintain existing prices or to meet the
competition's prices. This third category of pricing objectives has the major advantage of requiring little planning. It is essential a passive policy.
Often firms competing in an industry with an established price leader simply meet the competition’s prices.
These industries typical have fewer price wars than with direct price competition.
In other cases, managers regularly visit competitors’ stores to ensure that their prices are comparable.
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Toyota dominates the South African passenger motor vehicle market. As a result all other manufacturers follow their pricing. No competitor dares to announce a price increase unless it is to follow Toyota. Telkom is finding it increasingly difficult to not charge status quo prices in market where they face competition, for example in international calls.