Page 190 - DMGT408DMGT203_Marketing Management

Unit 8: Pricing: Understanding and Capturing Customer Value

Return on Investment (ROI): ROI is also a profit objective and aims at achieving some specified Notes
rate of return on company’s investment. Large companies such as Tata or Reliance are in a better
position to set pricing objectives in terms of ROI. They may decide to establish pricing objectives
usually independent of competition than do smaller companies. Return on investment pricing
objectives are set by trial and error because all relevant cost and revenue data are not available
to project the ROI at the time of price setting. ROI pricing objectives do not take into account
competitive prices and consumers’ perceptions of price.
Market Share: A large number of companies establish their pricing objectives in terms of market
share they want to capture of the total industry sales. The objectives can be to maintain existing
market share or increase in percentage terms. Companies want to maximise market share
believing that a higher sales volume will consequently bring down unit cost and lead to higher
profits in the long-run. The prices are set at the lowest possible level to generate higher sales and
larger market share. As the unit costs dip, prices are further reduced.

Example: Intel follows a different approach. When it develops a faster better processor,
it keeps the prices high aiming to skim the market. Subsequently, with decreasing unit costs it
keeps lowering its prices at intervals to capture the largest market share.

Market share and product quality, both, influence a firm’s profitability. Because of this reason,
companies often state their pricing objectives primarily in terms of market share. Maintaining
or increasing market share may not necessarily be dependent on growth in industry sales.

Product Quality: A company might have the objective to be a product quality leader in the
industry. Consumers directly relate price to quality, particularly in case of products that are ego
intensive of technology based. Such companies consistently strive and maintain high quality
and accordingly set higher prices to cover quality and high cost of research and development.
Caterpillar, Nikon, and Canon products set prices high to reflect quality.

Self Assessment

Fill in the Blanks:
5. …………………… focus on what a company wants to achieve through establishing prices.
6. …………………… pricing objectives do not take into account competitive prices and
consumers’ perceptions of price.
7. Consumers directly relate price to ……………………, particularly in case of products that
are ego intensive of technology based.

8.3 Factors Affecting Pricing Decisions

A number of different internal and external factors affect pricing decisions and this may pose
some complexity. In general, there is uncertainty about how consumers, competitors, resellers
etc. would react to prices. Price considerations are important in market planning, analysis,
marketing mix variables, demand forecasting, competitive structure, costs, and government
actions. To illustrate the point, let us just look at one factor, the competitive market structure and
what kind of affect this single factor can have on pricing decisions. However, it is necessary to
appreciate that all internal and external factors interact to influence pricing decisions.
1. Internal Factors: When setting price, marketers must take into consideration several factors
which are the result of company decisions and actions. To a large extent these factors are
controllable by the company and, if necessary, can be altered. However, while the organization
may have control over these factors making a quick change is not always realistic.

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