Pricing Decisions: Profit-Oriented, Sales & Status Quo

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  • 0:05 Profit-Orientation…
  • 2:13 Sales-Orientation…
  • 3:03 Competitor Pricing Orientation
  • 3:46 Customer Pricing Orientation
  • 4:14 Team Results
  • 5:03 Lesson Summary
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Lesson Transcript
Instructor: Jennifer Lombardo
Companies need to determine the main objective of their pricing strategy. The different objectives can be based on profit, sales, competition or customers. The end result should be customer satisfaction.

Our Ninja Corporation is having a boardroom-level brawl. It seems the board of directors can't decide what the company's overall pricing objectives should be in relation to their marketing plan. We have four different teams of ninjas who each want to pursue their pricing objectives. Which team will win? Let's find out based on the rationale they provide on why their objective should be chosen.

Profit-Orientation Pricing Objective

The Ninja Corporation Team 1 is made up of the accounting and finance department. They believe that although all companies are in business to make a profit, there are specific ways that Ninja Corp can establish a profit-orientation pricing strategy. The group wants to concentrate on target profit pricing, maximizing profits and target return pricing.

Target profit pricing's ultimate goal is to reach a particular level of profit by using price to get sales that produce a certain profit per unit. In this manner, a specific price needs to be selected that will bring in sales but also maximize profits.

The second method for profit orientation is called maximizing profits. Albert the Accountant from Team 1 believes that using a maximization of profits strategy will help with overall profits. He has a specific mathematic model that he has used to predict sales and profits. The theory is that if a firm can create a mathematic model that captures all sales and profit information, then it should be able to identify a specific price that will maximize profits. The biggest issue with this model is that it is very hard to develop a working mathematic model. There will be a lot of pressure on Albert to make sure his model is accurate.

The third way Team 1 would like to use profit orientation is by using a target return pricing objective. Team 1 is obsessed with specific rates of profit and wants to use pricing strategies to get to measurable return on investment to placate stockholders. This method is most concerned with rates of return on investment.

Sales-Orientation Pricing Objective

Team 2 of Ninja Corp's board of directors consists of the VP of sales and division managers. They feel that the overall pricing objective should be based on using a sales orientation. This philosophy is based on the idea that increasing sales will provide a better financial position than increasing profits. Team 2 would like to cut costs on numerous products in order to achieve a bigger market share and more sales. They feel that the shareholders will be satisfied, and it will also lead to a large customer growth. Team 2 also has told the board that a higher market share gives the Ninja Corp sales force an upper hand in the market. They can request product displays, promotions and shelf space, and the retailers are happy to oblige to market-share leaders.

Competitor Pricing Orientation

Competitor pricing strategy is very common with companies such as airlines and supermarkets. The goal is to set prices based on their competition. Airlines also follow a type of competitor pricing called status quo, which means companies only change prices to meet competitors. For example, if Airline A drops prices by $100 on all East Coast flights, then Airline B will quickly match Airline A's prices.

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