Prices represent a trade-off between short-term and long-term strategies, profitability and market share as well as levels of cash flow. A company sets its prices with different objectives in mind, such as profitability, cash flow or growth. A high price maximizes short-term profit but will result in a loss of market share, hence negatively impacting the long-term profit. A low price maximizes long-term profit because it is generally more attractive to customers, resulting in gained market share. The overall marketing strategy of a firm is a function of four main fields: costs, competition and market specificity, company objectives, target market and brand.
Every brand is associated with a certain brand image and the pricing must respect this brand image. Luxury brands avoid discounts or low prices because they damage the perceived value of their goods. Generally, prices associated with any brand must be coherent with the overall brand image, so all products are priced in accordance with each other.
Pricing strategies depend of the goal one wants to reach. If a company needs to increase its cash flow, it can do so by increasing its price.The immediate effect of the price raise results in higher margins and therefore higher profits, but the demand will slowly decrease as customers move on to buying from competitors. In the long term, the firm will reach a new equilibrium by losing some market share and gaining less profit.
If a company wishes to adopt a growth strategy, it will be required to decrease its price. The immediate effect of price reductions results in lower margins and lower profits, but a gain in market share over time. A growth strategy relies on the expectation that the short-term losses would be offset by the long-term profit. Keep in mind the lifetime value of a client when setting a pricing strategy for your business.