Posted on 10 December 2019
Companies must have clear objectives that reflect the motivation behind their pricing decisions before implementing pricing strategies to ensure these align effectively with their broader organisational needs. There are many directions a company’s pricing goals may take, dependent on numerous factors, such as organisational structure, size, purpose, and brand image.
Here are some commonly administered pricing goals that companies keep in mind when determining their product pricing.
Companies assess the best pricing and output strategies to achieve profit maximisation. Generally, small companies have this objective to gain external investment and increase their market penetration. As short-term profit maximisation is a high-risk move, it’s rarely undertaken as an ongoing pricing goal.
Some ways companies maximise their profit:
Example: A new e-commerce platform is seeking investment from larger organisations and must demonstrate its profitability within a short timeframe. The company slightly raises its product pricing, increases visibility over its inventory to remove slow-moving products and orders fast-moving product lines in bulk to save costs. They also offer free shipping on orders over a certain amount to encourage additional spend.
Larger/more established companies rely heavily on increased revenue to attract more investors. Even if companies are making little to zero profit, higher revenues help to grow market share and lower costs, effectively driving high profitability in the long-term.
Some ways companies maximise their revenue:
Example: A longstanding fast-food chain is preparing to become publicly listed and needs to boast high revenue to attract potential investors. To maximise revenue, the company conducts market research to discover the best geographical areas for new stores, creates a loyalty programme to grow brand awareness, and offers price bundling on meals at discounted pricing. The company’s supply chain is assessed and optimised to reduce wastage and improve cost efficiency.
Companies looking to maximise quantity aim to sell as many units of their product/gain as many new customers as possible in a designated timeframe. Increasing sales volume requires setting product pricing that will attract a record number of purchases. As such, companies do not usually have this objective for profit/revenue-raising purposes, but to increase market share and raise brand awareness/loyalty. Companies need to shift re-prioritise their existing long-term objectives to achieve this goal as a large amount of time and money must be committed to marketing, sales, and promotional activity of their product.
Example: Consider two smartphones on the market – Brand A ($599) and Brand B ($589). Both are priced similarly and offer near-identical features in terms of overall functionality and quality. However, Brand A holds 50% market share and Brand B has just launched its product with 10% market share. Brand A prepared for Brand B’s release by offering a special 20% discount in the weeks leading up to the release. Rather than grow profit, Brand A aims to maximise quantity to prevent customers from purchasing Brand B, hence retaining/growing market share.
Profit margins are calculated companies on three levels - gross profit, operating profit, and net profit. The simplest to determine is the gross profit margin; the amount a company earns once the cost of goods sold (COGS) is deducted, expressed as a percentage of total revenue. Profit margins are important as they accurately indicate if a company is or isn’t making money and if its products are priced appropriately or require adjustment. Companies aiming for long-term profitability must actively monitor their profit margins and undertake strategies to maximise them. One of the most effective ways that companies can achieve high-profit margins is by increasing their brand’s perceived value which enables higher product pricing for both the short and long term.
Example: A cosmetics company is pursuing consistently higher profit margins to establish itself for long-term growth. The company has decided to frame itself as a luxury brand to build exclusivity of its product and justify a significant pricing increase across its entire range. The company works extensively on re-packaging, re-marketing, and relaunching its new look, hoping to increase profit margins through sales of the higher-priced product line.
Products/services that have been on the market for a substantial amount of time often reach a level of equilibrium as a range of alternatives become available. Companies that are looking to differentiate their product from competitors can do so by changing several of its elements, one of which is price. This could involve setting lower prices to appear more economical than other brands or setting higher (premium) prices to appear more prestigious.
Example: An electronics company is facing market saturation across its wide range of products. To differentiate from its competitors the company sets its prices significantly higher than other brands and promote themselves as leaders in the tech space to remain unique from the rest of the market and justify their higher prices.
To increase access to products/services for broader society, companies will opt for “fair” pricing, taking socio-economic constraints into account during the pricing process. Such companies are typically not-for-profit or run on considerably low-profit margins to deliver lower pricing to their customers and services that are highly accessible This objective focuses on enabling affordable access to everyday provisions, and in some cases to help establish self-sufficiency and long-term investment opportunities for underprivileged individuals.
Example: Microfinance companies operate in some of the world’s poorest countries, providing loans to people living in poverty. These loans help these individuals to start businesses under living circumstances that would cause ineligibility for other financial services. Such organisations offer low-interest fees and extended repayment periods to further support the borrower.
For certain industries, external organisations determine prices, such as regulators, wholesalers, and retailers. In these cases, there is limited negotiation between involved parties and the external body makes the final decision.
Example: In Australia, processors buy, process, and package milk from farmers, before delivering it to supermarkets for retail. Processors set the buying price for milk, meaning farmers do not determine how much they sell their product for. Supermarkets’ retail prices are then determined separately, and independently from the initial farmgate value.