Comprehension check. Target return on investment

STATUS QUO PRICING

MARKET SHARE GOALS

TARGET RETURN ON INVESTMENT

PROFIT MAXIMIZATION

SURVIVAL

PRICING PROBLEMS

SUPPLEMENTARY READING

Before management can set prices for a firm’s pro­ducts, it must decide what it expects to accomplish through pricing. That is, management must set pricing objectives that are in line with both organizational and marketing objectives.

Of course, one objective of pricing is to make a profit, but this may not be a firm’s primary objective. One or more of the following factors may be just as important.

A firm may have to price its products to survive – either as an organization or as a factor in a particular market. This usually means that the firm will cut its price to attract customers, even if it then must operate at a loss. Of course, such a goal can’t be pursued on a long-term basis. Consistent losses would cause the business to fail.

Many firms may state that their goal is to maximize profit, but this goal is impossible to define (and thus impossible to achieve). What, exactly, is the ‘maximum profit’? How does a firm know when it has been reached? Firms that wish to set profit goals should express them as either specific money amounts or percentage increases over previous profits.

The return on investment (ROI) is the amount earned as a result of that investment. Some firms set an annual-percentage ROI as their pricing goal.

A firm’s market share is its proportion of total industry sales. Some firms attempt, through pricing, to maintain or increase their share of the market.

In pricing their products, some firms are guided by a desire to maintain the status quo. This is especially true in industries where price stability is important. If such a firm can maintain its profit or market share simply by charging about the same price as competitors’ for similar pro­ducts – then it will do so.

1. What must management take into account before setting prices?

2. Which points from the text are the following statements referred to?

1) A firm’s market share is its proportion of total indus­try sales.

2) Firms that wish to set profit goals should express them as either specific money amounts or percentage in­creases over previous profits.

3) A firm may have to price its products to survive. This usually means that the firm will cut its price to attract customers.

4) Some firms set an annual-percentage return on in­vestment (ROI) as their pricing goal.

5) In pricing their products, some firms are guided by a desire to maintain the status quo (pricing).

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