Internal Factors Affecting Pricing Decisions

Internal Factors Affecting Pricing Decisions

Internal factors affecting pricing include the company's marketing objectives, marketing­mix strategy, costs and organization.

• Marketing Objectives Before setting price, the company must decide on its strategy for the product, If

the company has selected its target market and positioning carefully, then its the company has selected its target market and positioning carefully, then its

marketing­mix strategy, including price, will be fairly straightforward. For example, if Toyota decides to produce its Lexus cars to compete with European luxury cars in the high­income segment, this suggests charging a high price. Travel Lodge positions itself as motels that provide economical rooms for budget­ minded travellers; this position requires charging a low price. Thus pricing

strategy is largely determined by past decisions on market positioning. At the same time, the company may seek additional objectives. The clearer a

firm is about its objectives, the easier it is to set price. Examples of common objectives are survived, current profit maximization, market­share maximiz­ ation and product­quality leadership.

Companies set survival as their fundamental objective if they are troubled by too much capacity, heavy competition or changing consumer wants. In Europe and Japan steel­makers sell steel at a loss as demand declines. To keep a plant

going, a company may set a low price, hoping to increase demand. In this case, profits are less important than survival. As long as their prices cover variable costs and some fixed costs, they can stay in business. However, survival is only a short­ term objective. In the long run, the firm must learn how to add value or face

extinction, 4 Many companies use current profit maximization as their pricing goal. They estimate what demand and costs will be at different prices and choose the price that will produce the maximum current profit, cash flow or return on investment. In all cases, the company wants current financial results rather than long­run

performance. Other companies want to obtain market­share leadership. They believe that the company with the largest market share will enjoy the lowest costs and highest long­run profit. To become the market­share loader, these firms set prices as low as possible.

A variation of this objective is to pursue a specific market­share gain. Say the company wants to increase its market share from 10 per cent to 15 per cent in one year. It will search for the price and marketing programme that will achieve this goal.

Digital television transmission is set to make the current analogue television as outdated as 16mm cine film or vinyl albums. Tt produces cinema quality pictures while cramming hundreds of channels through the wave bands needed for a do?,en analogue transmissions. Seeing the mould­breaking" potential of digital TV satellite television company, BSkyB and terrestrial BOB are set to battle for market leadership of digital television transmission. BSkyB's consortium of BT, IISBC and Matsushita aims to subsidize its TV set­top converters by ecul billion,

retailing them at ecu.100, although they will cost at least twice that to manufacture.

A company might decide that it wants to achieve product­quality leadership. This normally calls for charging a high price to cover such quality and the high costofR&D:

For example, Jaguar's limited edition XJ220 sold for £400,000 each, but had wealthy customers queuing" to buy one. Less exotically, Pitney Bowes pursues a product­quality leadership strategy for its fax equipment. While Sharp, Canon and other competitors fight over the low­price fax machine market with machines selling at around $500, Pitney Bowes targets large corporations with machines selling at about 85,000. As a result, it captures some 45 per cent of the large­corporation fax niche. 5

684 • Chapter 16 Pricing Considerations and Approaches

A company might also use price to attain other more specific objectives. It can set prices low to prevent competition from entering the market or set prices at competitors' levels to stabilize the market:

In 1994 grocery market leaders Sainsbury and Teseo used 'Essentials' and 'Everyday super value range' campaigns to counter the attack of discounters Aldi and Netto on the UK market. Originally projected to take

20 per cent of the grocery market by the year 2000, forecasters later predicted the discounters would take only 12 per cent. 6

Prices can be set to keep the loyalty and support of resellers or to avoid govern­ ment intervention. Prices can be reduced temporarily to create excitement fora product or to draw more customers into a retail store. One product may be priced

to help the sales of other products in the company's line. Thus pricing may play an important role in helping to accomplish the company's objectives at many levels.

Non­profit and public organizations may adopt a number of other pricing objectives. A university aims fm partial cost recovery, knowing that it must rely on private gifts and public grants to cover the remaining costs. A non­profit hospital may aim for full cast recovery in its pricing. A non­profit theatre company may price its productions to fill the maximum number of theatre seats.

A social service agency may set a social price geared to the varying income situ­ ations of different clients.