SurvivalMost executives pursue strategies that align pricing with revenue generation, enabling their organizations to survive and thrive long term. Show
Learning Objectives Name the different factors that impact a company's success and survival Key TakeawaysKey Points
Key Terms
SurvivalFirms rely on price to cover the costs of production, pay expenses, and provide the profit incentive necessary to continue to operate the business. These factors help an organization survive. Most managers pursue strategies that enable their organizations to continue in operation for the long term. Thus, survival is one major objective pursued by company executives. For a commercial firm, the price paid by the buyer generates the firm's revenue. If revenue falls below cost for a long period of time, the firm cannot survive. Survival is closely linked to new product development, profit, sales, market share, and image. New ProductsFor several decades, business has come increasingly to the realization that new and improved products may hold the key to their survival and ultimate success. Consequently, professional management has become an integral part of this process. As a result, many firms develop new products based on an orderly procedure, employing comprehensive and relevant data and intelligent decision-making.The continuing development of a successful new product looms as the most important factor in the survival of the firm. ProfitMaking a $500,000 profit during the next year might be a pricing objective for a firm. Anything less will ensure failure. All business enterprises must earn a long term profit. For many businesses, long term profitability also allows the business to satisfy company stakeholders such as investors, employees, customers, and suppliers. Lower-than-expected or no profits will drive down stock prices and may prove disastrous for the company. SalesJust as survival requires a long term profit for a business enterprise, profit requires sales. The task of marketing management relates to managing demand. Demand must be managed in order to regulate exchanges or sales. Thus, marketing management's aim is to alter sales patterns in some desirable way. Market ShareIf the sales of Safeway Supermarkets in the Dallas-Fort Worth metropolitan area of Texas account for 30 percent of all food sales in that area, we say that Safeway has a 30 percent market share. Management of all firms, large and small, are concerned with maintaining an adequate share of the market so their sales volume will enable the firm to survive and prosper. Again, pricing strategy is one of the tools that is significant in creating and sustaining market share. Prices must be set to attract the appropriate market segment in significant numbers. ImagePrice policies play an important role in affecting a firm's position of respect and esteem in its community. Price is a highly visible communicator. It must convey the message to the community that the firm offers good value, that it is fair in its dealings with the public, that it is a reliable place to patronize, and that it stands behind its products and services. Surviving the Recession: Pricing plays a significant role in attracting and retaining market share during tough economic times. ProfitIf the sole objective of a firm is to maximize profit, there are various profit maximizing pricing methods that can be used. Learning Objectives Recall formulas for calculating profit maximizing output quantity and marginal profit Key TakeawaysKey Points
Key Terms
Profit and Pricing ObjectivesSome firms decide to set prices to maximize profits for either the short run or the long run. There are several methods to maximizing profits: Profit-based Sales Targets In launching new products or considering the pricing of current products, managers often start with an idea of the dollar profit they desire and ask what level of sales will be needed to reach it. Target volume (#) is the unit sales quantity needed to meet an earnings goal. Target
revenue ($) is the corresponding figure for dollar sales. Increasingly, marketers are expected to generate volumes that meet the target profits of their firm. This will often require them to revise sales targets as prices and costs change. The Total Cost MethodTo obtain the profit maximizing output quantity, you start by recognizing that profit is equal to total revenue (TR) minus total cost (TC). Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph. The profit maximizing output is the one at which this difference reaches its maximum. In, the linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling price. The profit maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB. This output level is also the one at which the total profit curve is at its maximum. If, contrary to what is assumed in the graph, the firm is not a perfect competitor in the output market, the price to sell the product at can be read off the demand curve at the firm's optimal quantity of output. Total Profit Maximization: This linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market. As a result, it cannot set its own selling price. The Marginal Cost Perspective An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC). Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit
is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced. At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit. Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is
zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels. Return on InvestmentMarketers should understand the position of their company and the returns expected when making adjustments in prices. Learning Objectives Explain why pricing objectives focus on delivering a return on investment (ROI) Key TakeawaysKey Points
Key Terms
Pricing objectives or goals give direction to the whole pricing process. Determining what your objectives are is the first step in pricing. When deciding on pricing objectives, you must consider: Return on Investments: The chart shows the rate of return on investments after training teachers. Market Share/SalesIncreasing market share is one of the most important objectives of business and pricing may offer a mechanism to increase share. Learning Objectives Explain the relationship between market share and pricing strategies Key TakeawaysKey Points
Key Terms
Market share is a key indicator of market competitiveness—that is, how well a firm is doing compared to its competitors. It enables them to judge not only total market growth or decline but also trends in customers' selections among competitors. Generally,
sales growth resulting from primary demand (total market growth) is less costly and more profitable than that achieved by capturing share from competitors. Conversely, losses in market share can signal serious long-term problems that require strategic adjustments. Firms with market shares below a certain level may not be viable. Similarly, within a firm's product line, market share trends for individual products are considered early indicators of future opportunities or problems. Pricing Strategies: Changing the pricing strategy might be part of a longer-term strategy to increase market share in on-line video streaming. Marketers need to be able to translate sales targets into market share because this will determine whether forecasts should be attained by growing with the market or by capturing share from competitors. The latter will almost always be more difficult to achieve. Market share is closely monitored for signs of change in the competitive landscape, and it frequently drives strategic or tactical decisions. Increasing market share is one of the most important objectives of business. The main advantage of using market share as a measure of business performance is that it is less dependent upon macro environmental variables such as the state of the economy or changes in tax policy. Cash FlowCash flow is extremely important to firms as this is how they buy goods, pay employees, fund new investments, and pay dividends. Learning Objectives Identify the different pricing strategies for generating cash flow in an organization Key TakeawaysKey Points
Key Terms
Cash flow is the movement of money into or out of a business. The measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation. Some companies will set prices so that they can recover cash flow as quickly as possible. This strategy could be due to the company spending too much of its resources on developing products. This typically requires setting prices very high, which is a disadvantage since competitors can set prices lower and gain a larger market share. Seasonal Sales : A quick way to generate cash flow is to offer seasonal discounts. Cash flow is extremely important to a firm. This is how they buy goods, pay employees, fund new investments, and pay dividends. It is
necessary to determine the effects of pricing on cash flow to a firm. Status QuoStatus quo pricing is the concept that some goods within certain industries have an expected price for consumers, due to a relative norm within that market. Learning Objectives Recognize that some product types have relative consistent pricing, and entering those markets often requires the ability to produce at that price or lower Key TakeawaysKey Points
Key Terms
When setting a price for a given product or service, there are countless objectives an organization may have that will impact how and why a price is determined. While there are too many objectives to provide a comprehensive list, some of the more common pricing objectives include:
Many industries have key competitors that wield a great deal of power and influence within the industry. As a result, new entrants and smaller players are often forced to attain a similar efficiency in operations and become able to sell a given good at a specific price or lower. These larger, strong players often have scale economies, which slowly make the 'status quo' price of a given good lower than is obtainable by other incumbents. Status Quo Pricing As a result of this, some firms pursue status quo pricing as a pricing objective. In this situation, they assess the overall market to determine what the going prices are for the product or service they will sell. Once this price point is established, the organization will strive to build
an operational mechanism that enables the organization to be profitable at the price point (or possibly lower). This objective is particularly useful when applied to mature industries with firmly set price points and a low variance in price elasticity in the consumer groups. Price Fixing An extremely important ethical consideration of this pricing objective is avoidance of price fixing. Price fixing is the illegal practice of various competitive firms within an industry agreeing on a fixed price for goods within an industry. If all competitive firms agree on price, there is no real practical different for the consumer between this and a monopoly. Product QualityQuality refers to the ability of a product or service to consistently meet or exceed customer requirements or expectations. Learning Objectives Identify the different aspects
and determinants of product quality Key TakeawaysKey Points
Key Terms
Broadly defined, quality refers to the ability of a product or service to consistently meet or exceed customer requirements or expectations. Different customers will have different expectations, so a working definition of quality is customer-dependent. When discussing quality one must consider design, production, and service. In a culmination of efforts, it begins with careful assessment of what the customers want, then translating this information
into technical specifications to which goods or services must conform. The specifications guide product and service design, process design, production of goods and delivery of services, and service after the sale or delivery.
Successful management of quality requires that managers have insights on various aspects of quality. These include defining quality in operational terms, understanding the costs and benefits of quality, recognizing the consequences of poor quality and recognizing the need for ethical behavior. Understanding dimensions that customers use to judge the quality of a product or service helps organizations meet customer expectations. Dimensions of Product Quality
Determinants of Quality
High-quality cars: The Mercedes-Benz SLR McLaren has a reputation for extremely high quality. Its handmade engine is a sign of the quality. Licenses and AttributionsCC licensed content, Shared previously
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What is the focus of target return on sales pricing?The target return is a pricing method that's closely associated with an investment related to a specific product/endeavor. The target return is calculated based on the amount of money invested in a particular venture, including the profit that the investor wants to see in return, adjusted for the time value of money.
What are the 4 types of pricing objectives?The four types of pricing objectives include profit-oriented pricing, competitor-based pricing, market penetration and skimming.
What is the objective of a target return strategy?Income as Target Return Objective
The target return objective is to provide enough spending money and maintain the value of the portfolio after allowing for taxes and inflation.
What are salesSales-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.
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