HCEB 3104: MARKETING MANAGEMENT

INDIVIDUAL ASSIGNMENT
“The objectives of price setting by marketing organizations.”

Kinuu Isaac Njuguna – H334-033-0246/2011

Presented to: Esther Kamanja

 Introduction
The task of the marketing manager is to decide the objectives of pricing before he determines the
price itself. Pricing objectives provide guidance to decision makers in formulating price policies,
planning pricing strategies and setting actual prices. The most important objective of the
companies is to have maximum profits. The marketing manager has to decide the objective of
pricing before actually setting price. Pricing objectives are the overall goals that describe the role
of price in an organization’s long-range plans. The objectives help the marketing manager as
guidelines to develop marketing strategies. The clearer a firm’s objectives, the easier it is to
price.

Price is the value placed on what is exchanged. Before determining the price itself, the
organization must establish a pricing objective compatible with the goals for the organization
and its marketing program.

Selecting the pricing objective

A company can pursue any of the five major pricing objectives through pricing:

1. Survival,
2. Maximum current profit,
3. Maximum market share
4. Maximum market skimming
5. Product-quality leadership
6. Product line promotion

7. Price stabilization

Survival

Perpetual existence of the business over a period is the indication of the sound financial position
of the organization. All organizations will have to meet expected and unexpected, initial and
external economic losses. These enterprises have to pool up the resources to meet all the
contingencies through appropriate pricing strategies. Price is used to increase sales volume to
level up the ups and downs that come to the organization.

Organizations pursue this objective if they are plagued with overcapacity, intense competition, or
changing consumer wants. As long as the company covers variable costs and some fixed costs,
the company stays in business. Survival is a short-run objective; in the long run, the firm must
learn how to add value or face extinction.

Maximum current profit

Many companies try to set a price that will maximize current profits. They estimate demand and
costs associated with alternative prices and choose the price that produces maximum current
profit, cash flow, or rate of return on investment. This strategy assumes that the firm has
knowledge of its demand and cost functions; in reality, these are difficult to estimate.

In emphasizing current performance, the company may sacrifice long-run performance by

ignoring the effects of other marketing-mix variables, competitor’s reactions and legal
constraints of price.

Profit maximization does not mean profiteering. There is nothing wrong in this policy if
practiced over the long run. As a matter of fact, many of the organizations strive to maximize
their profits. Maximization of profits should be on the total output and not on a single item. In
such case, consumers do not get dissatisfied since a particular group is not called for paying a
high price. While adopting this pricing objective, the marketers should attempt to project their
image in the market through sales promotion techniques. The marketers should watch the
reactions of the consumers. Profit maximization through price hikes should be sparingly used.

Maximum market share

Some companies want to maximize their market share. They believe that higher sales volume
will lead to lower unit costs and higher long-run profits. They set the lowest price, assuming the
market is price sensitive. This is called market-penetration pricing. Market penetration objective
is an attempt to secure a large share of the market by deliberately setting the low prices. The
following conditions favor adopting a market penetration pricing.

a. The market is highly price sensitive and a low price stimulates market growth
b. Production and distribution costs fall with accumulated production experience
c. A low price discourages actual and potential competition

Maximum market skimming

Market skimming means utilizing the opportunities in the market to reap the benefits of high
sales, increased profits and low unit costs. Some of the organizations study the buyer’s needs and
try to provide the suitable goods but charge them high prices. This objective is realized in those
markets where the magnitude of competition is very low. The organizations, in this situation,
make profits over a short period.

Companies unveiling a new technology favor setting high prices to maximize market skimming.
They practice market skimming pricing in which prices start high and slowly drop over time in
order to “skim” the maximum amount of revenue from the various segments of the market. This
strategy can be fatal though if a worthy competitor decides to price low. Market skimming
makes sense under the following conditions:-
 i. A sufficient number of buyers have a high current demand
ii. The unit costs of producing a small volume are not so high that they cancel the advantage
of charging what the traffic will bear
iii. The high initial price does not attract more competitors to the market
iv. The high price communicates the image of a superior product.
Product quality leadership

A company might aim to be the product quality leader in the market. Many brands strive to be
“affordable luxuries”- products or services characterized by high levels of perceived quality,
taste and status with price just high enough not to be out of customer’s reach.

Product line promotion

Product line means a group of products that are related either because they satisfy similar needs
of different market segments or because they satisfy different but related needs of a given market
segment. While framing the product line, the marketer may also include such goods, which are
not popular. The intention of the marketer is to push through all the goods without any
discrimination. Thus, the ultimate objective is to increase the overall demand of the goods. In
this pricing objective, equal prices are adopted for the entire product line.

Price stabilization

Frequent changes in the prices of product will harm the long-term interests of the companies.
Hence, they aim at stabilization of prices. They do not exploit a short supply position to earn the
maximum. During the periods of good business, they try to keep prices from rising and during
the periods of depression, they keep prices from falling too low. Thus, they take a long-term
view in achieving price stability.

Other Pricing Objectives

Social and ethical objectives: Nonprofit organizations and government agencies these
objectives to cover their costs where possible and to raise money for their activities.

Status Quo objectives: maintain market share by meeting competitor prices, achieving price
stability, or maintaining public image.

Prestige pricing objectives: establish a relatively high price to develop and maintain an image
of quality and exclusiveness.

Conclusion
Pricing objectives are overall goals that describe what the firm wants to achieve through its
pricing efforts. Because, pricing has it’s ramifications in most functional areas including finance,
accounting and production. The major pricing objectives are market share, meeting competition
and profit. Pricing policies are based on cost, demand and competition.