A profit-oriented pricing strategy focuses on profit maximization.
Pricing strategy is used by business strategists, accountants and marketers alike to achieve various sales goals. A profit-oriented pricing strategy is one of three dominant pricing approaches. Often referred to as “profit margin” pricing, this type of pricing seeks to maximize total net profit, rather than compete with other like products, setting prices comparable to market competitors or pricing strategically to increase sales volume over a specific time period.
Profit-oriented, or “profit margin,” pricing strategies rely on setting a product or service’s price to attain a specific, predetermined net profit percentage. In other words, the price is set to attain a set profit amount after all production and marketing costs are deducted. For example, a product that costs $100 and is sold for $200 would generate $100 per unit or 50 percent net profit. Generally, a profit-oriented pricing strategy means the price is set to maximize profit, pricing the product at whatever top limit the market will bear.
A profit-oriented pricing strategy is one of three dominant pricing approaches, according to the Special Libraries Association literature on pricing strategy. It often seeks to maximize profit. Other approaches include sales-oriented pricing and competition matching. Sales-oriented pricing strives to increase units sold and therefore generate profit based on volume. Competition matching seeks to keep the price consistent with similar products and services in the market, neither undercutting nor placing a premium price on the product in question.
Example 1: Apple
Apple is a good example of a company using profit-oriented price. Apple products are almost always the most expensive in their category. These products are also typically considered innovative and high quality. The company does not typically price to match the competition. It very rarely uses sales or discounts to encourage volume pricing. Instead, Apple relies on its reputation and strong fan base to accept and purchase its products at a price it sets internally to generate desired profits.
Example 2: Harley Davidson
Another example of a company that uses primarily profit-oriented pricing is Harley-Davidson, the famous motorcycle manufacturer. The Harley brand is world-renowned. Its customers are fiercely loyal and its products have a reputation for quality. This allows the company to set pricing based on desired profit margin, rather than relying on sales designed to increase volume or matching its competitors’ pricing. By setting itself apart from the competition as a brand, this company paved the way for a premium pricing strategy that works.
Questions to Ask
Asking yourself a few key questions before recommending or employing a profit-oriented–or any other–pricing strategy may help avoid costly disasters. Some suggestions: Will the selected pricing strategy increase your overall financial position in the time frame required or desired? Do you have the required resources to withstand market fluctuations that may temporarily reduce sales? Or, is your price set high enough to provide enough net profit over time, despite market fluctuations? Will the market bear your price? Is it reasonable in relation the competition or do you provide enough added value to assuage price concerns? Detailed research, planning and analysis will help you select and implement the best pricing strategy for you.