Introduction
Many people in Taiwan can wait in a long line for free fried chicken or Starbucks' buy one get one free, even if it takes hours. But do you know how do profit-seeking companies generate profits if they frequently offer free goods and services for special deals? Does a $0 price tag equals a free lunch? Is free products or services a good pricing strategy? Put on a price tag for products and services is essential for every profit-seeking company. However, their customers must feel they are getting enough value for the price paid. For instance, a Big Mac® combo meal can be very different while put on different price tags such as $5.99 or $12. Here is the major concept we are going to learn, the pricing objectives. It is the goals that give directions to the overall pricing processes and the crucial step in pricing. Each pricing objective requires a specific strategy to achieve different goals.
Pricing Objectives, Profit-Oriented or Sales-Oriented
Profit-oriented pricing is based on profit maximization or a target return on investment to guarantee each sale is making money. However, it does not means companies should simply add up their raw materials and production labor expenses. Other crucial costs such as advertising costs, commissions, and freight. In short, all other costs in getting the product to be purchased are counts.
Sales-Oriented, on the other hand, generally focuses on maximizing sales to generate as much revenue as possible, regardless of the profits. Here's an interesting part, revenues are not the same as profits. A company can sell 1,000 espresso coffee machines for $1,000,000 in revenue, but with zero profit. That happens sometimes when companies are struggling financially, so they have to generate cash quickly.
In summary, I think both of the two have their own pros and cons. For instance, if Nespresso decides to lower the prices of its machines to make them more affordable, the profits and revenues will be shrinking in a short period. However, when more and more people are using its machines, Nespresso is targeting more coffee capsule sales since more capsule sales mean more revenues and profits. Therefore, based on what kind of return and outcome that a company is trying to achieve, the pricing objectives are very different. In the Expresso's case, if the machine is too expensive, it also influences its capsule sales. However, too cheap to own an espresso machine will make the company cost too much to get future income.
What Factors Do Organizations Consider When Making Pricing Decisions?
As we all learned from the demand and supply model in Economic, demand, and supply are the factors that influence the equilibrium prices. Base on the model, consumers are on the demand factors whereas enterprises are on the supply side. Generally, companies tend to supply more when the price is upper or the demand is higher. Therefore, the demand for a product or service is the foundation of firms making their pricing decisions.
However, demand is not the only thing that should be considered. If the demands are the necessary products such as food, water, or electricity, governments often regulate them by law. In addition, competitors also playing a crucial role in this equilibrium game. For instance, KFC and McDonald's are very similar fast-food restaurants. They closely monitoring each other's menu, learn from each other and compete with each other. Typically, the costs of a product are the first thing we think about. But remember, don't make it become the ONLY thing you considered before you release a product.
Penetration and Skimming Pricing Strategy
Penetration pricing strategy is used to quickly gain market share by setting a relatively lower price to induce customers. It is commonly used by new entrants. For instance, a Taiwan coffeehouse chain LOUISA entered the coffeehouse business by setting more affordable prices of its coffee drinks compare to its major competitor Starbucks in 2006. Now, LOUISA opens more than 500 coffeehouses in Taiwan and exceeds the number of Starbucks stores.
Skimming pricing strategy, however, is a product pricing strategy by charging relatively higher initial prices. For instance, as the costs reduction, Tesla cuts the price of its Model 3 from $46,990 to $45,990. As the demand of the first customers is satisfied and more electric car manufacturers enter the market, Tesla now lowers the price to attract another, the more price-sensitive segment of the consumers.
Reference
Tanner, J. & Raymond, M.A. (2015). Principles of Marketing. University of Minnesota Open Textbook Library. Licensed under a Creative Commons by-nc-sa.
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