Objectives of pricing
The ideal solution to a pricing problem requires selecting that price which offers the greatest promise of realizing the objectives desired by management. Since no price can logically achieve different objectives with equal success, management should determine the most important objective to be realized before trying to establish a price. This determination requires that, for each pricing problem, management must decide whether the objective concerns profit maximization, company growth, market share, a combination of such factors, or any other consideration.
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Box 1: It's Time for Time
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GPI - makers of brands like Four Square, Rothmans and Jaisalmer - has launched a new cigarette, Time, in the regular filter segment. Priced at Rs.4.90 a pack, the pricing strategy is aimed at appealing to the middle income groups as it works out to an affordable price of 50 paise per stick. Also, the idea is to push impulsive buyers.
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Positioned as a 'smoke that you will cherish', Everest Advertising has developed a campaign which depicts a couple sharing happy moments of relaxation. Though the imagery closely resembles that of a competitor's brand, Time is hoping to gain popularity mainly through its convenient pricing strategy.
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If the primary objective is to maximize profits, cost analysis can help select the price that will yield the greatest profit. Under this condition, cost accounting aids management by furnishing not only the estimated costs to make and sell a given volume of the product, but also the estimated profits that may be accrued at different prices. Whenever an objective other than profit maximization is desired, cost analysis can help management determine the importance of the goal by showing the profit penalty to be paid for its attainment. This may be accomplished by calculating the estimated profits realizable at alternative prices. The difference between the estimated maximum profit and the estimated profit obtainable at a lower price represents the projected penalty of selecting that price.
Assume that a company is planning to launch a new bath soap called 'Leam' into the market. The company manufactures the product at a per unit cost of Rs.5.50. Now arises the problem of pricing. The management wants to capture major market share. Since its objective concerns share of the market and not profit maximization, it can quote a comparatively less price than that of its competitors. If the market price of bath soaps of its competitors is Rs.7.00, the company may fix the price at Rs.6.50, i.e., below the market rate so that it can occupy a place in the market. Now, this Re.0.50 per unit of the product (which is the difference between the maximum profit obtainable and the profit obtained because of lower pricing) is the projected penalty of selecting that price. This is the price they are paying for the realization of the objective desired by management. The company may compare the non-profit benefits with estimated penalties associated with a specific price reduction as its basis for accepting or rejecting a given goal.
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