MARKETING PLAN EXPLORER
Copyright 2002, Professor Jerome M. Katrichis
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V. GENERATION OF ALTERNATIVE MARKETING PLANS
V. B. 2. A. Objectives - Alternatives
Purpose of this section is to propose changes to the pricing objectives being utilized by the organization.
In general, organizations may use one of five different pricing objectives. Those include:
1. Maximizing market share.
2. Maximizing profit.
3. Market skimming.
4. Quality image projection
When the objective of the organization is to maximize market share they use what is sometimes called penetration pricing. This is setting a price lower than competitors in order to "buy" market share. In the long run, this pricing objective can only be effective if the organization follows a cost leadership strategy, or if they have the financial size to outlast competitors if a pricing war ensues.
In order to maximize profit, the organization must have detailed information regarding what their current cost and demand functions look like. Because these functions are constantly changing, in practice this objective is really impossible to operationalize. Instead, firms will typically use a target revenue or return on investment number to set their prices.
Market skimming occurs when an organization sets a high initial price on their offering and then "slides down the demand curve." This type of pricing approach occurs most commonly with new technology products. The firm sets a high initial price and then waits for everyone that will buy at that price to buy. Then the firm lowers the price until everyone that will buy at the new price buys. The firm then continues to lower prices in small increments literally sliding down the demand curve.
When organizations want to project an image of quality they will typically price well above the usual market price. This technique is probably easiest to see with restaurants. As one of the things that you pay for in a restaurant is atmosphere and the other patrons in the restaurant are part of that atmosphere, this becomes sort of a self-fulfilling prophecy.
A pricing objective of survival is utilized by organizations that have an excess of unused capacity. This can only be a viable objective in the short run. When organizations have excess short term capacity they may set prices that do not fully recover all costs. They might do this if they have skilled workers and don't want to risk losing them due to layoffs, or if they determine that some contribution to fixed costs is better than no contribution in the short run. In the long run, such an objective is a recipe for bankruptcy.