UNIT - 5
Pricing decision is involved in every economic activity. we pay rent for a house, fees to doctor, commission to salesman, premium for insurance , wages to workers. Like wise, business firms also face the problem of deciding the price of the product. The problem is not so easy, particularly when it is to be decided for the first time, that is for a new product and that too for a new market. The reason is that consumer behavior regarding the new product cannot be accurately known. A slight change in price may change the demand pattern, affecting profits of the firm. Entry of the new firms can also influence the situation.
Pricing is one of the most important function of business firms. As these firms incur expenses in producing goods and services , they must set prices for these goods and services to get revenue. Price exerts a direct influence on the demand as well as supply of the product and hence turnover as well as profit. If a firm sets an appropriate product price , it would succeed and flourish in the market.
Objectives :
The following are the commonly adopted major pricing objectives of a business firm.
- Survival
- Achieving a target return on investments
- Price stability
- Achieving market share
- Prevention of competition
- Increased profits
1. Survival : Basically , in these days of monopolistic competition / dynamic changes and business uncertainties , a firm is always interested in its continued survival first. For the sake of assuring continued existence generally , a firm is ready to tolerate all kinds of upheaval ( a sudden change) in product lines, organizational and personnel changes.
2. Achieving a target return on investments : This is the most important objective which every concern wants to achieve. The objective is to achieve a certain rate of return on investments and frame the pricing policy in order to achieve that rate. For example , the concern may have a set target of 20 % return on investment and 10 % return on investments after taxes. The targets may be a short term ( usually for a year ) or a long term. It is advisable to have a long term target.
sometimes , it is observed that the actual profits rates may be more than the target return. This is because the targets already fixed are low and new opportunities and demand of the product exceeding the return rate already fixed.
3. Pricing stability : This is another important objective of an enterprise. Stability of prices over a period reflects the efficiency of a concern. But in practice, on account of changing costs from time to time , price stability cannot be achieved. In the market where there are few sellers, every seller wants to maintain stability in prices. Price is set by one producer and others follow him. He acts as a leader in price fixation.
4. Achieving market share : market share refers to the share of the company in the total sales of the product in the market. Some of the concerns when introduce their product in the competitive market want to achieve a certain share in the initial stages. In the long run the concern may aim at achieving a sizeable portion of the market by selling its products at lower prices.
The main objective of achieving larger share in the market is to enjoy more reputation and goodwill among the people. The other consideration of widening the markets by lowering prices is to eliminate competitors from the market.
5. Prevention of competition : Modern industrial set up is confronted with cut throat competition. Pricing can be used as one of the effective means to fight against the competition and business rivalries. Lesser prices are charged by some firms to keep their competitors out of the market. But a firm cannot afford to charge fewer prices over a long period of time.
6. Increased profits : Maximization of profits is one of the main objectives of a business enterprise. A firm can adopt such a price policy which ensures larger profits. However , such enterprises are also expected to discharge certain social obligations also.
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