What is pricing objective

The lower price set on products by using penetration pricing is done to entice the maximum number of customers possible to purchase your product. Large numbers of customers purchasing your product should maximize your revenue and the quantity of product sold. If the price were higher, you would expect fewer purchases, thus leading to lower revenues.

Premium pricing— employed when the product you are selling is unique and of very high quality, but you only expect to sell a small amount. These attributes demand that a high, or premium, price be attached to the product. Buyers of such products typically view them as luxuries and have little or no price sensitivity.

The advantage of this pricing strategy is that you can price high to recoup a large profit to make up for the small number of items being sold. To demonstrate, let's say that you have a flock of sheep and you shear, dye, and spin your own yarn.

Your yarn is known in the industry as being of extremely high quality. Some of that yarn you use to knit sweaters, blankets, and scarves.

Since your yarn and knitting are very high quality and you know that you probably won't be making and selling a large quantity of your knitted items, you decide to employ premium pricing. Your customers already know of the fine quality of your yarns or they are in higher income brackets, so they will most likely pay a premium price for your premium knitted products.

Premium pricing can be employed with the profit margin maximization or quality leadership pricing objectives. The premium price charged for the uniqueness and quality of your product allows you to generate large profit margins on each item sold. Your product will also demonstrate your commitment to quality, and customers will think of you when they desire such quality. Product bundle pricing— used to group several items together for sale. This is a useful pricing strategy for complementary, overstock, or older products.

Customers purchase the product they really want, but for a little extra they also receive one or more additional items. The advantage of this pricing strategy is the ability to get rid of overstock items. On the other hand, customers not wanting the extra items may decide not to purchase the bundle.

This strategy is similar to product line pricing, except that the items being grouped together do not need to be complementary. For example, you have remaining stock of Christmas-related items after the holidays.

If you prefer not to store these items until next year, you could put a variety of items in a small bag and sell the bag at a discounted price. Product bundle pricing can be employed with revenue maximization or quantity maximization objectives since bundling products may result in the sale of products that may have gone unsold.

Quality leadership can be achieved since some customers will appreciate having the opportunity to purchase a group of items at a discount. The partial cost recovery or survival objectives can be fulfilled from a product bundling pricing strategy when products likely would have gone unsold otherwise and selling the products at a discount allows you to recover some portion of the production cost or generates enough of a profit to stay in business or keep from having to remove the product from market.

Product line pricing— used when a range of products or services complement each other and can be packaged together to reflect increasing value. This pricing strategy is similar to the multiple pricing strategy. However, rather than purchasing a greater quantity of one item, the customer is purchasing a different item or service at a higher price that is still perceived as a value when compared to the price for the individual product or service.

Let's say that in your farm market you sell jams, syrups, and pancake mixes, among other items. These items can be considered complementary since people usually put jam and syrup on pancakes. In addition to selling each of these items individually, you could create a gift box that packages one of each item together. The price for this gift box would be slightly less than what a customer would pay in total when purchasing each of the same items individually.

The product line pricing works well with the profit maximization and quality leadership pricing objectives since you are increasing profit by encouraging the purchase of a greater number of products that may not have been purchased individually. Additionally, some customers will value the ability to purchase a group of complementary products.

Skim pricing— similar to premium pricing, calling for a high price to be placed on the product you are selling. However, with this strategy the price eventually will be lowered as competitors enter the market. This strategy is mostly used on products that are new and have few, if any, direct competitors when first entering the market.

Let's say you develop a carbonated, flavored, milk-based beverage packaged in ounce plastic bottles. Since there are few drinks of this sort on the market, you could use skim pricing until more products come to market. The skim pricing strategy should be reserved for when your pricing objective is profit maximization, revenue maximization, or profit margin maximization.

Employing this strategy when your product is new on the market and there is no competition generates greater revenue, profit, and profit margins since you are the only one selling the product— customers must buy from you if they want what you are selling.

You must use caution, though, so as to not price so high though that customers aren't willing to buy your product even though there are no competitors. Choosing a pricing objective and a related strategy requires you to carefully consider your business and financial goals, the state of the market including its past and future , and the products and prices of your competition and possibly their business goals.

You want to select objectives and strategies that will position your product and business for success. Choosing an objective and strategies that are appropriate for your business at the current time does not prevent you from changing objectives or employing different strategies in the future as your business grows or changes.

Giddens, N. Parcell, and M. Selecting an Appropriate Pricing Strategy. Ames: Iowa State University Extension, Close Privacy Overview This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website.

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Some examples of pricing objectives include maximising profits, increasing sales volume, matching competitors' prices, deterring competitors — or just pure survival. Each pricing objective requires a different price-setting strategy in order to successfully achieve your business goals. It requires you to have a firm understanding of both your product attributes and the market.

Your choice of a pricing objective does not have to last forever. As business and market conditions change, adjusting your pricing objective may become necessary or appropriate. Pricing objectives are selected with your business and financial goals in mind.

Elements of your business plan can guide your choice of a pricing objective and the strategies that go with it. If your business mission is to be a leader in your industry, you may want to consider a quality leadership pricing objective. On the other hand, profit margin maximisation may be most appropriate if your business plan calls for growth in production in the near future, since you will need funding for facilities and labour.

Some objectives, such as survival and price stability will be used when market conditions are poor or shaky, when first entering a market, or when a business is experiencing hard times and needs to restructure. This objective is aimed, simply, at making as much money as possible for your business — and to maximise price for long-term profitability. Price has both a direct and indirect effect on your profits - the direct effect relates to whether the price actually covers the cost of producing the product.

Price affects profit indirectly by influencing how many units sell. The number of products sold also influences profit through economies of scale, i. Sales-oriented pricing objectives seek to boost volume or market share. A volume increase is measured against a company's own sales across specific time periods.

A company's market share measures its sales against the sales of other companies in the industry. Volume and market share are independent of each other, as a change in one doesn't necessarily activate a change in the other. The main sales-related pricing objectives include:. Every company tries to react to their competitors with appropriate business strategies. With reference to price they may wish:.

Increasing prices doesn't automatically mean losing customers. Most businesses take a twofold approach to profit maximization: they go for a price increase to juice their top-line revenue, and they reduce costs to increase their bottom-line profit.

Both numbers play into each other to provide a superior return on investment—increasing pricing might lower the number of sales without reducing revenue , which lowers per-account costs like support and hosting.

Getting the high-end buyers to buy your product may be a less profitable objective than having many middle-class buyers buy your product. You might find that you are spending more to acquire customers at the higher price point or that your churn rate increases after changing your prices. Creating a retention-first pricing strategy can be a great objective for SaaS companies.

Putting retention first can be a great option for subscription companies, but you need to balance that against acquisition costs. Another way you can optimize your pricing is for maximum trial sign-ups.

Set your initial pricing low—or even offer a freemium option—to encourage more prospective customers to sign up for your platform. Then, monetize them later through upsells and expansion revenue. You can play with pricing elements such as free trial lengths, money-back guarantees, and free value-add services, like installation or configuration, to help maximize adoption.

Another great pricing objective for subscription companies is to extend the lifecycle of their product line and maximize the length of customer contracts. Longer contracts correlate directly to greatly reduced churn while also keeping your acquisition costs in check.

The optimal contract length for SaaS startups varies, according to Tomasz Tunguz , but annual or longer contracts bring stability and predictability.

They also give customer success teams more opportunity to create meaningful relationships with new customers and help them achieve their goals. Ask yourself: Is your contract as long as it should be? Are you retaining users for a year and then letting them go or keeping them for a decade?

Can lengthening your contract help minimize costs down the road? Yes, beating the competition might sound obvious, but your prices can be a powerful tool for maintaining or increasing your market share. Competitor objectives are not the most important thing to consider, but they have their relevance.