Pricing Policy

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• A pricing policy is a standing answer to recurring question. A systematic approach to pricing requires the decision that an individual pricing situation be generalized and codified into a policy cover­age of all the principal pricing problems. Policies can and should be tailored to various competitive situations. A policy approach which is becoming normal for sales activities is comparatively rare in pricing.
• Most well managed manufacturing enterprises have a clear cut advertising policy, product customer policy and distribution-channel policy. But pricing decision remains a patchwork of ad hoc decisions. In many, otherwise well managed firms, price policy has been dealt with on a crisis basis. This kind of price management by catastrophe discourages the kind of systematic analysis needed for clear cut pricing policies.
• (i) Price-Profit Satisfaction:
• The firms are interested in keeping their prices stable within certain period of time irrespective of changes in demand and costs, so that they may get the expected profit.
• (ii) Sales Maximization and Growth:
• A firm has to set a price which assures maximum sales of the product. Firms set a price which would enhance the sale of the entire product line. It is only then, it can achieve growth.
• (iii) Making Money:
• Some firms want to use their special position in the industry by selling product at a premium and make quick profit as much as possible.
• (iv) Preventing Competition:
• Unrestricted competition and lack of planning can result in waste­ful duplication of resources. The price system in a competitive economy might not reflect society’s real needs. By adopting a suitable price policy the firm can restrict the entry of rivals.
• Decision on Market Targets
• When the company has developed some idea of the range of demand and the range of prices that are feasible for the new product, it is in a position to make some basic strategic decisions on market targets and promotional plans. To decide on market objectives requires answers to several questions: What ultimate market share is wanted for the new product? How does it fit into the present product line? What about production methods? What are the possible distribution channels?
• These are questions of joint costs in production and distribution, of plant expansion outlays, and of potential competition. If entry is easy, the company may not be eager to disrupt its present production and selling operations to capture and hold a large slice of the new market. But if the prospective profits shape up to a substantial new income source, it will be worthwhile to make the capital expenditures on plant needed to reap the full harvest.
• A basic factor in answering all these questions is the expected behavior of production and distribution costs. The relevant data here are all the production outlays that will be made after the decision day—the capital expenditures as well as the variable costs. A go-ahead decision will hardly be made without some assurance that these costs can be recovered before the product becomes a football in the market. Many different projections of costs will be made, depending on the alternative scales of output, rate of market expansion, threats of potential competition, and measures to meet that competition that are under consideration. But these factors and the decision that is made on promotional strategy are interdependent. The fact is that this is a circular problem that in theory can only be solved by simultaneous equations.
• Fortunately, it is possible to make some approximations that can break the circle: scale economies become significantly different only with broad changes in the size of plant and the type of production methods. This narrows the range of cost projections to workable proportions. The effects of using different distribution channels can be guessed fairly well without meshing the choices in with all the production and selling possibilities. The most vulnerable point of the circle is probably the decision on promotional strategy. The choices here are broad and produce a variety of results. The next step in the pricing process is therefore a plan for promotion.
• Design of Promotional Strategy
• Initial promotion outlays are an investment in the product that cannot be recovered until some kind of market has been established. The innovator shoulders the burden of creating a market—educating consumers to the existence and uses of the product. Later imitators will never have to do this job; so if the innovator does not want to be simply a benefactor to future competitors, he or she must make pricing plans to recover initial outlays before his or her pricing discretion evaporates.
• The innovator’s basic strategic problem is to find the right mixture of price and promotion to maximize long-run profits. He or she can choose a relatively high price in pioneering stages, together with extravagant advertising and dealer discounts, and plan to recover promotion costs early; or he or she can use low prices and lean margins from the very outset in order to discourage potential competition when the barriers of patents, distribution channels, or production techniques become inadequate. This question is discussed further later on.