Internal Assignment 3 Unit 2

Q1 Can a firm have different pricing objectives in the short run as opposed to long run? Discuss the cost oriented and demand oriented methods of pricing. Ans. 1 Price is the assignment of value, or the amount the consumer must exchange to receive the offering. Pricing strategy is one of the most difficult areas of marketing decision making. It deals with the methods of setting profitable and justifiable prices. A firms pricing strategies may be based on costs, demand, or the prices of competing products. Pricing is probably the least understood and least appreciated element of the marketing mix. Pricing Objectives of Profit-Seeking Organizations: Companies set prices for a variety of reasons. Price affects and is affected by the other three elements of the marketing mix: product, promotion, and place (distribution). Profitability Objectives When pricing strategies are determined by profit objectives, the focus is on a target level of profit growth or a desired net profit margin. A profit objective is important to firms that see profit as what motivates shareholders and bankers to invest in a company. Theoretically, marketers could use marginal analysis, a method that uses cost and demand to identify the price that will maximize profits. Profit is maximized at the point at which marginal cost is exactly equal to marginal revenue. Relatively few firms actually hit this elusive target, however. A significantly larger number prefer to direct their effort toward more realistic goals. Consequently, marketers commonly set target-return objectives, short-run or long-run pricing objectives of achieving a specified return on either sales or investment. This return is usually stated as percentages of sales or investment. These objectives serve as tools for evaluating performance; and they satisfy desires to generate fair profits as judged by management, stockholders, and the public.

Sales Volume Objectives Some economists and business executives believe that pricing behavior actually seeks to maximize sales within a given profit constraint. Companies following this approach continue to expand sales as long as their total profits do not drop below the minimum return acceptable to management. Sales maximization can also result from non-price factors such as service and quality. If a companys product has a competitive advantage, keeping the price at the same level as other firms may satisfy sales volume objectives. Another volume-related pricing objective is the market-share objective. Volume-related objectives such as sales maximization and market share are important to most firms pricing decisions. The Profit Impact of Market Strategies (PIMS) project, which was conducted by the Marketing Science Institute, analyzed more than 2,000 firms and discovered that two of the most important factors influencing profitability were product quality and market share. The relationship between market share and profitability is demonstrated in PIMS data that reveal an average 32 percent return on investment (ROI) for firms with market shares above 40 percent. In contrast, average ROI decreases to 24 percent for firms whose market shares are between 20 and 40 percent. Firms with even less market share had less ROI. This relationship also applies to a firms individual brands. Evidently, firms with large shares accumulate greater operating experience and lower overall costs relative to competitors with smaller market shares. This suggests that firms might achieve higher financial returns by becoming major competitors in smaller market segments rather than by remaining minor players in larger markets. Competition Objectives In many cases, firms set their own prices to match those of established industry price leaders. Pricing objectives tied directly to meeting prices charged by major competitors deemphasize the price element of the marketing mix and focus more strongly on nonprice variables. Pricing is a highly visible component of a firms marketing mix and an easy and effective tool for obtaining a differential advantage over competitors. It is, however, a

tool that other firms can easily duplicate through price reductions of their own. Because price changes directly affect overall profitability in an industry, many firms attempt to promote stable prices by meeting competitors prices and competing for market share by focusing on product strategies, promotional decisions, and distributionnon-price elements of the marketing mix. Another type of competitive pricing objective is a pricing plan that is intended to have a certain effect on the marketing efforts of the competition. Sometimes a firm may deliberately seek to preempt or reduce the effectiveness of one or more competitors using pricing. For example, Toys R Us could launch a price offensive by distributing coupons for popular products just before Christmas, hoping to catch competitors such as Wal-Mart off guard and steal their customers. Prestige Objectives Prestige pricing establishes a relatively high price to develop and maintain an image of quality and exclusiveness that appeals to status-conscious consumers. Such objectives reflect marketers recognition of the role of price in creating an overall image of the firm and its product offerings. In other words, pricing and positioning are intimately related. Products positioned in the marketplace as high-quality, exclusive, luxurious, and prestigious would normally carry a relatively high price, since marketers know that price is often an important means of communicating these product characteristics to prospective customers and of enhancing the products image. Customer Satisfaction Objectives Many quality-focused firms believe that profits result from making customer satisfaction the primary objective. These firms believe that by focusing solely on short-term profits a company loses sight of keeping customers for the long term. Saturns one price and one price only (no haggling, no negotiation, no deals) value pricing strategy is one example of a customer satisfaction pricing objective. Flexibility of Price Objectives

It is important that pricing objectives be flexible. Often it is necessary to develop pricing objectives tailored to different geographic areas and time periods. When there are varying levels of competition in different parts of the country, it may be necessary to lower prices in the areas with the heaviest competition. Some geographic regions may have greater sales potential, making it wise for firms to develop pricing objectives aimed at obtaining a larger market share in those areas. Also, marketing conditions can change during the year, requiring price adjustments for seasonal as well as other reasons. Pricing Objectives of Not-for-Profit Organizations: Pricing is usually a key element of the marketing mix for not-for-profit organizations. Profit Maximization Though not-for-profit organizations arent typically organized to maximize profits, there are numerous instances in which they do try to maximize their returns on specific events or a series of events. A $1,000-a-plate political fundraiser is an example. Cost Recovery Some not-for-profit organizations attempt to recover only the actual cost of operating the organization. Toll roads and bridges, publicly supported colleges, and mass transit are examples. The amount of recovered costs is often dictated by tradition, competition, or public opinion. Market Incentives Some not-for-profit organizations follow a lower-than-average pricing policy or offer free services in order to encourage increased usage of the product. Seattles bus system offers free service in the downtown area in an attempt to reduce traffic congestion, encourage retail sales, and minimize the effort required to access downtown public services. Market Suppression: Price can discourage consumption. High prices help to accomplish social objectives independent of the costs of providing goods or services. Examples are sin taxes (tobacco and alcohol taxes), parking fines, tolls, and gasoline excise taxes.

Objectives of the Price Policy:

The following objectives are to be considered while fixing the prices of the product. 1. Profit maximization in the short term The primary objective of the firm is to maximize its profits. Pricing policy as an instrument to achieve this objective should be formulated in such a way as to maximize the sales revenue and profit. Maximum profit refers to the highest possible of profit. In the short run, a firm not only should be able to recover its total costs, but also should get excess revenue over costs. This will build the morale of the firm and instill the spirit of confidence in its operations. It may follow skimming price policy, i.e., charging a very high price when the product is launched to cater to the needs of only a few sections of people. It may exploit wide opportunities in the beginning. But it may prove fatal in the long run. It may lose its customers and business in the market. Alternatively, it may adopt penetration pricing policy i.e., charging a relatively lower price in the latter stages in the long run so as to attract more customers and capture the market. 2. Profit optimization in the long run The traditional profit maximization hypothesis may not prove beneficial in the long run. With the sole motive of profit making a firm may resort to several kinds of unethical practices like charging exorbitant prices, follow Monopoly Trade Practices (MTP), Restrictive Trade Practices (RTP) and Unfair Trade Practices (UTP) etc. This may lead to opposition from the people. In order to over come these evils, a firm instead of profit maximization, aims at profit optimization. Optimum profit refers to the most ideal or desirable level of profit.Hence, earning the most reasonable or optimum profit has become a part and parcel of a sound pricing policy of a firm in recent years. 3. Price Stabilization Price stabilization over a period of time is another objective. The prices as far as possible should not fluctuate too often. Price instability creates uncertain atmosphere in business circles. Sales plan becomes difficult under such circumstances. Hence, price stability is one of the pre requisite conditions for steady and persistent growth of a firm. A stable price policy only can win the confidence of customers and may add to the good will of the concern. It builds up the reputation and image of the firm.

4. Facing competitive situation One of the objectives of the pricing policy is to face the competitive situations in the market. In many cases, this policy has been merely influenced by the market share psychology. Wherever companies are aware of specific competitive products, they try to match the prices of their products with those of their rivals to expand the volume of their business. Most of the firms are not merely interested in meeting competition but are keen to prevent it. Hence, a firm is always busy with its counter business strategy. 5. Maintenance of market share : Market share refers to the share of a firm's sales of a particular product in the total sales of all firms in the market. The economic strength and success of a firm is measured in terms of its market share. In a competitive world, each firm makes a successful attempt to expand its market share. If it is impossible, it has to maintain its existing market share. Any decline in market share is a symptom of the poor performance of a firm. Hence, the pricing policy has to assist a firm to maintain its market share at any cost. 6. Capturing the Market Another objective in recent years is to capture the market, dominate the market, command and control the market in the long run. In order to achieve this goal, sometimes the firm fixes a lower price for its product and at other times even it may sell at a loss in the short term. It may prove beneficial in the long run. Such a pricing is generally followed in price sensitive markets. 7. Entry into new markets. Apart from growth, market share expansion, diversification in its activities a firm makes a special attempt to enter into new markets. Entry into new markets speaks about the successful story of the firm. Consequently, it has to bear the pioneering and subsequent risks and uncertainties. The price set by a firm has to be so attractive that the buyers in other markets have to switch on to the products of the candidate firm.

8. Deeper penetration of the market

The pricing policy has to be designed in such a manner that a firm can make inroads into the market with minimum difficulties. Deeper penetration is the first step in the direction of capturing and dominating the market in the latter stages. 9. Achieving a target return A predetermined target return on capital investment and sales turnover is another long run pricing objective of a firm. The targets are set according to the position of individual firm. Hence, prices of the products are so calculated as to earn the target return on cost of production, sales and capital investment. Different target returns may be fixed for different products or brands or markets but such returns should be related to a single overall rate of return target. 10. Target profit on the entire product line irrespective of profit level of individual products. The price set by a firm should increase the sale of all the products rather than yield a profit on one product only. A rational pricing policy should always keep in view the entire product line and maximum total sales revenue from the sale of all products. A product line may be defined as a group of products which have similar physical features and perform generally similar functions. In a product line, a few products are regarded as less profit earning products and others are considered as more profit earning. Hence, a proper balance in pricing is required. 11. Long run welfare of the firm A firm has multiple objectives. They are laid down on the basis of past experience and future expectations. Simultaneous achievement of all objectives are necessary for the over all growth of a firm. Objective of the pricing policy has to be designed in such a way as to fulfill the long run interests of the firm keeping internal conditions and external environment in mind. 12.Ability to pay Pricing decisions are sometimes taken on the basis of the ability to pay of the customers, i.e., higher price can be charged to those who can afford to pay. Such a policy is generally followed by those people who supply different types of services to their customers. 13. Ethical Pricing

Basically, pricing policy should be based on certain ethical principles. Business without ethics is a sin. While setting the prices, some moral standards are to be followed. Although profit is one of the most important objectives, a firm cannot earn it in a moral vacuum. Instead of squeezing customer, a firm has to charge moderate prices for its products. The pricing policy has to secure reasonable amount of profits to a firm to preserve the interests of the community and promote its welfare. Cost Oriented Pricing: Cost oriented pricing tends to be more popular in retail industries as opposed to service industries since the pricing is based on the cost of the goods or services. Most often a performers costs are limited to minutia like mouth coils, lemons, hat tears, flash paper, wireless microphone batteries, cleaning of costumes and other, relatively inexpensive items. However, it is important to remember these costs as you establish your price. Cost-Plus Pricing is, intuitively enough, cost plus a certain amount. Maybe it is cost plus $275 for example. If your costs include assistants and hotel accommodations this might be a workable method for you. Markup is cost plus a certain percentage. In many retail businesses the markup has to be at least 50% (that means 50% of the price the consumer pays is markup over cost) or the retailer wont carry the product. That is, a retailer often assumes they must be able to double their money or it isnt worth carrying. This markup percentage is so widespread that it is often called Keystone Pricing. Demand Oriented Pricing: Demand oriented pricing might suggest lower prices for less in-demand times or shows, and a higher fee for busier times. Many magicians raise their fees for evening shows in the month of December, often doubling their standard fee. In our productions company we've found public libraries in our area prefer Tues, Wed, and Thurs. for summer reading programs and avoid Mondays and Fridays. So for a while I considered lowering our fee if the libraries would book on a Monday or Friday (until I learned that Child Care Facilities PREFER Mondays and Fridays and just filled those days with a different client type!). Birthday party magic shows are more popular on Saturday than on Sunday or Friday afternoon. January is traditionally slow for many performers and this may be a time to have lower rates. Of course, this can result in some difficulty explaining two-price policy to repeat customers who want to book you in the

slower periods. On the other side of the same coin, demand oriented pricing may encourage you to raise your fee by simply recognizing the value of your service to the client and their resultant demand for your service. A good trade show magician may be able to generate $100,000 to $1 million or more of new business at a trade show for a particular company. Many trade show exhibitors spend tens of thousands of dollars exhibiting at a given trade show and they dont want to risk hiring someone who wont produce results as the cost could be much greater than the magicians fee. The magician's fee might represent only a very small fraction of the total spent on the show, but it could drastically increase or decrease the effectiveness of the entire show. This is why GOOD trade show magicians are able to command high prices while those less skilled or without a reputation might have difficulty finding work at any fee.