Your pricing objective sets the foundation for your pricing strategy and can be a deciding factor between business failure and success.
The price you choose impacts more than just how much money you make or whether are competitive with the market. Rather than thinking about pricing as a sporadic, one-off process, ensure your prices are set iteratively to help you reach your changing goals.
What are Pricing Objectives?
Pricing objectives are the goals that drive how you price your offerings. For every business goal you have, there should be a pricing objective and strategy to help you achieve it. Remember that incorrectly mixing pricing objectives and strategies may cause contradictions that prevent you from achieving your business goals, so always ensure they are closely matched.
While profit is the most common pricing objective (and rightly so), there are more nuanced objectives that every business should consider. At Revenue Management Labs, we emphasize using the Balanced Revenue Management Framework when setting your pricing objectives. The Framework helps to establish objectives that consider the perspectives and needs of your entire organization. More specifically, The Framework calls for the balance between Sales, Finance, and Marketing.
Based on the three pillars of The Framework, some potential sales-oriented pricing and marketing price objectives include:
1. Gaining volume: Sales Oriented Pricing
2. Growing market share: Sales Oriented Pricing
3. Increasing revenue/margin dollars: Financial Price Objective
4. Capturing value: Marketing Price Objective
Let’s go through each in more detail to help you understand which pricing objective is best for your business.
Sales Oriented Pricing Objectives
How to Gain Volume With Your Pricing Strategy
Some companies base their pricing strategy on maximizing sales by strategically setting prices to promote immediate growth. This is most common for established companies who already have a piece of the market. Their focus is primarily centered around improving overall sales, which directly impacts profit. As such, they utilize volume pricing to achieve such goals. Volume pricing at its core is a strategy that accounts for discounts when large quantities are purchased. The larger the order, the larger the discount. The rationale is that the company expects the lower price to make up the difference with a higher sales volume.
Volume pricing can be beneficial because it requires companies to establish large-scale infrastructure to support the large purchase sizes, which can help reinforce a company’s brand and strengthen customer loyalty. Therefore, volume pricing tends to work better for larger incumbents in the market because they have the scale and operational capacity to fulfill large orders. These traits also help offset the company’s fixed costs. For example, if a company can produce one million widgets but only sell 500,000, they can drive efficiency in fixed costs by selling another 500,000 widgets.
Grow Your Market Share With Sales Oriented Pricing Objectives
A market penetration strategy focuses on getting a foothold in a competitive market by maximizing product adoption. Companies usually set a lower initial price (or if you are a XaaS business, offer a freemium option) to encourage more customers to try their offering. Then, once customers become loyal users, they increase monetization opportunities later through upsells or expansion revenue. You can experiment with many pricing elements, such as money-back guarantees or free value-add services to help maximize adoption.
However, this strategy can be risky for businesses if customers get accustomed to the lower price. Any mention of price increases will be met with heavy pushback. To overcome this, ensure your products offer quality or uniqueness that your competitors do not. Doing so will make it easier to convince customers to buy from you – even if at a higher price point. Check out our article on overcoming customer objections to learn more!
Note that with these sales-related pricing objectives, you need to consider the industry you are in before choosing between growing market share/volume. For industries that are declining (e.g. Beer, Tobacco), lowering your price will not drive volume since the size of the pie is shrinking. What lowering price will do, however, is allow you to fight for the remaining market share. In contrast, if your business is in a trending market (e.g. organic or natural products), lowering the price can move lots of volume. Why? Because the market is still growing and new customers are entering the market, looking to find the best deal. In this situation, pricing has greater leverage in convincing people to try your offering.
Unfortunately, lowering prices only work if you can afford to live on margin, so I recommend exhausting every other option before using this strategy. Further, extended periods of low prices may eventually result in a price war between competitors where no one is able to make money, so utilize low prices at your own risk.
Profit-Oriented Pricing Objective
Increase Revenue & Margin With Pricing Objectives
The goal of profit-oriented pricing is to maximize the margin of each sale as well as the long-term profitability of the business. That is, make as much money as possible for as long as possible. Most businesses take two paths to maximize profit – they either raise prices to increase their top-line revenue or reduce costs to increase bottom-line profit.
Before choosing your path, make sure you understand who your customers are. For example, if you are a software company, increasing your price to attract high-end buyers may not be a worthwhile endeavor if you find the cost of acquisition and churn rates are greater compared to middle-class buyers.
Further, understand that maximizing profit and maximizing revenue are two completely different things depending on what you want to accomplish. Returning to the software company example, say your platform scales with every new customer. In this situation, focusing on revenue rather than profit is better because there are no variable costs associated with additional customers. Compare this to a company selling cereal, where there is an added variable cost every time you sell your product. In this case, you should focus on the bottom line. All this to say, be sure to consider all the fixed and variable costs within your business before determining which financial objective to pursue.
Marketing Based Price Objective
How to Capture Value With Pricing Objectives
Customers should be central to every business decision and pricing is no exception. Your prices should be set high enough that customers value your product and continue using it, but low enough that you are not turning off your target customers with high and sticky prices. To hit this sweet spot, utilize value-based pricing, a strategy of setting prices based on how much the customer believes your offering is worth.
Value-based pricing requires customer data as well as an understanding of the relative value of your offerings. You will also need to analyze the competition because once you have the data, you want to know the other options customers have open to them. At RML, we help companies succeed in value pricing by building the following organizational capabilities:
- Customer Data and Insights: Understanding what customers really want and how much they are willing to pay for what they want
- Economics: Understanding both the internal economics of the company and the economics of the market
- Pricing Management: Setting the right price and making sure that your discounting policy makes sense
- Pricing Psychology: Understanding that it is the customer’s perception of the price that drives the behavior
Contact RML to Learn More About Pricing Strategies
With so many pricing objectives to choose from, what is the optimal number? Every business is different, so the number of pricing objectives will vary. However, I suggest having more than one objective. Ideally, you want a mix of objectives that address each pillar of the Balanced Revenue Management Framework (Sales, Marketing, Finance) discussed earlier.
If you would like Revenue Management Labs to help you determine which pricing objectives to pursue and how to achieve our business goals, get in touch today!