Question

Explain the objectives of pricing strategies that a company may have while setting its pricing strategy.

Answer 1

1. Target Rate of Return: An adequate return on investment or net sales is an important pricing objective. The idea is to secure a sufficient return on capital employed after covering costs of production and distribution Prices are so set that the total sales revenue exceeds the total costs by the estimated profit amount.
2. Price Stability: In this objective, a firm seeks to cut or eliminate cyclical price fluctuations and to avoid price wars. The aim is to live and let live. All the firms try to avoid price wars. No firm is willing to cut its prices for fear of retaliation by other firms. In order to avoid fluctuations in prices, they may even forgo maximising profits during the period of scarce supply or prosperity.
3. Market Share: Market share (sales of a firm in relation to those of competitors) is a very meaningful metric for measuring the market position or success. The company captures more share in the market when consumers get attracted to purchase a product/service because of its pricing. For example, firms manufacturing refrigerators, washing machines, and similar products reduce prices to capture a larger share of the growing demand in India.
4. Meet or Prevent Competition: In a market characterised by cut-throat competition, firms often take pricing decisions to meet or prevent competition. An established firm may cut prices drastically to prevent competitors from entering a market. Some firms match competitors’ prices to maintain the status quo within an industry. This objective may also be adopted while introducing a new product. Sometimes a company adopts below-cost pricing to fight competition. But in the long run firm cannot survive by charging less than the total cost of product.
5. Profit Maximisation: Firms pursuing this objective try to earn as much money as possible. Small and little-known firms may try to charge as much as the customer can bear. Due to high profits, new entrepreneurs will be attracted to the industry, and prices will come down in the long run.