Setting Clear Pricing Objectives

Why Objectives Come First

The first step in any pricing decision is clarifying what you're trying to achieve. Without clear objectives, you have no way to evaluate whether a price is 'right.' A price that maximizes short-term profit might sacrifice market share needed for long-term success. A price that builds share rapidly might destroy profitability. Neither is inherently wrong—but you must know which you're pursuing.

Many pricing mistakes stem from unclear or conflicting objectives. Leadership declares 'we want to grow profitably' but provides no guidance on trade-offs when growth and profitability conflict. Sales compensation emphasizes revenue while finance evaluates success on margin. Marketing pursues premium positioning while operations pushes for volume to achieve economies of scale. These conflicts produce incoherent pricing—a compromise that serves no objective well.

Clear objectives resolve these conflicts by establishing priorities. When trade-offs arise—as they inevitably do—objectives provide the decision criteria. Should we take this deal at a lower margin to hit our volume target? The answer depends on which objective takes priority.

The Hierarchy of Pricing Objectives

Pricing objectives should cascade from corporate strategy through business unit goals to specific product decisions. At each level, objectives become more specific and measurable.

Level

Example Objectives

Pricing Implications

Corporate

Achieve 18% ROE; maintain #1 or #2 position in core markets

Sets overall profitability requirements and strategic priorities

Business Unit

Grow revenue 12% while maintaining 38% gross margin

Defines acceptable price-volume trade-offs for the portfolio

Product Line

Maximize contribution; defend against Competitor X entry

Guides specific pricing tactics and competitive response

SKU/Transaction

Achieve minimum $75 contribution per unit sold

Sets floor for deal-level decisions and discount authority

This hierarchy matters because it prevents local optimization that hurts the whole. A product manager might maximize their product line's contribution by pricing high—but if this opens the door for competitor entry that threatens the entire portfolio, it's the wrong decision. The hierarchy ensures that lower-level objectives serve higher-level strategy.

Primary Pricing Objectives Deep Dive

Profit Maximization

Profit maximization means finding the price that generates the highest absolute profit—margin per unit times volume sold. This sounds simple but requires understanding the demand curve: how volume changes as price changes.

At very low prices, you sell high volume but earn thin margins—total profit is modest. At very high prices, you earn fat margins but sell few units—total profit is again modest. Somewhere in between lies the profit-maximizing price where marginal revenue from the last unit sold equals marginal cost of producing it.

Profit maximization is appropriate when you have reasonable demand estimates that allow optimization, competitive conditions are stable (you're not fighting for share), there's no strategic imperative for market position (share doesn't drive future economics), and shareholders prioritize current returns over growth.

The key analytical requirement is understanding price elasticity—how sensitive demand is to price. We'll cover elasticity measurement in Lesson 2.2.

Revenue Maximization

Revenue maximization prioritizes top-line growth over current profitability. This sounds irrational—why would shareholders want revenue instead of profit?—but it makes sense in specific situations.

Revenue maximization is appropriate when market share drives future profitability through network effects (more users make the product more valuable, like social networks), through learning curves (costs drop with cumulative volume, creating durable advantage), or through switching costs (once customers adopt, they're sticky, making current share valuable for future revenue).

Revenue maximization is also appropriate when investors value growth over profits—common for venture-backed companies where the terminal value depends on market position rather than current earnings. And it may be appropriate when reaching scale is required for operational efficiency—you need volume to spread fixed costs and achieve competitive unit economics.

The risk of revenue maximization is building an unprofitable business that requires continued investment without ever generating adequate returns. The 'growth at all costs' era of 2010s tech companies showed the perils of revenue maximization without a path to profitability.

Case Study: Revenue Maximization Done Right: Amazon Web Services When AWS launched cloud computing services, Amazon priced aggressively below what traditional infrastructure would cost—and below what would have maximized short-term profit. The revenue maximization strategy made sense because cloud computing exhibits strong learning curves (costs fall dramatically with scale), network effects (more customers attracted more developers and tools), and switching costs (once built on AWS, applications are costly to migrate). By capturing share early, Amazon built advantages that justified the margin sacrifice. Today, AWS is both the market leader and highly profitable—the revenue maximization investment paid off.

Market Penetration

Penetration pricing sets deliberately low prices to build market share rapidly. It's revenue maximization taken to an extreme—explicitly sacrificing current profit for future market position.

Penetration works when demand is highly price-elastic (low prices attract many customers), the market has strong learning effects (your costs will fall as you gain experience), network effects reward early scale (early share creates sustainable advantage), and you have resources to sustain losses during the investment phase.

Penetration pricing carries significant risks. It may trigger price wars if competitors match your aggression. It can build a low-price brand image that's difficult to change later. It attracts price-sensitive customers who may churn when better deals appear. And it requires deep pockets—you must fund losses until economics turn positive.

Market Skimming

Skimming is the opposite of penetration—starting with high prices to capture maximum value from customers with highest willingness to pay, then gradually reducing prices to reach broader markets.

Skimming works when genuine innovation justifies early premiums—customers will pay more to have it first. It works when competitors can't quickly match your offering—you have a window of exclusivity. It works when customers don't resent early buyers paying more—either because they don't compare or because early access has legitimate value. And it works when the high initial price doesn't slow adoption below critical mass—some products need network scale to function.

Case Study: Skimming Strategy: Apple iPhone Apple has consistently used skimming with iPhone releases. New models launch at premium prices targeting enthusiasts, status-seekers, and those who must have the latest technology. These 'innovators' and 'early adopters' willingly pay $1,000+ for the newest device. As the product matures, Apple introduces older models at lower prices and reduces prices on current models. By the end of each product cycle, iPhones are available across a wide price range. This approach captures maximum value from customers with highest willingness to pay while eventually serving price-sensitive segments. Apple can sustain skimming because its innovation creates genuine differentiation, its brand supports premium positioning, and its product cycles are short enough that customers accept paying more for early access.

Survival Pricing

In crisis situations—severe demand collapse, liquidity emergency, existential competitive threat—survival becomes the objective. Survival pricing means covering variable costs to generate cash, even if contribution toward fixed costs is inadequate.

Survival pricing is appropriate only as a temporary measure while addressing underlying problems. A business that permanently survives on contribution that doesn't cover fixed costs will eventually fail—it's just delaying the inevitable. Survival pricing buys time to restructure costs, find new markets, or raise capital.

The floor in survival pricing is variable cost—selling below variable cost means losing money on every transaction with no possibility of recovery. Even in survival mode, you shouldn't sell below variable cost unless you're liquidating inventory to exit.

Making Objectives Operational

Objectives must be specific enough to guide decisions. 'Maximize profit' is a direction, not an objective. 'Achieve $2.5 million contribution from this product line in FY25' is an objective you can actually use.

Good pricing objectives are

• Specific: Clear about what metric matters (profit, revenue, share, contribution)
• Measurable: Quantified so you can track progress and evaluate results
• Time-bound: Defined for a specific period (quarter, year, product lifecycle)
• Trade-off aware: Explicit about priorities when objectives conflict
• Aligned: Consistent with higher-level strategy and other functional objectives Document your objectives formally and communicate them to everyone involved in pricing decisions. When a sales rep asks whether to offer a 15% discount to close a deal, they should be able to evaluate that decision against the objective without escalating.

Key Takeaways

• Clear objectives are the foundation of all pricing decisions—without them, you can't evaluate if a price is right
• Objectives should cascade from corporate strategy through business units to individual products
• Different objectives (profit max, revenue max, penetration, skimming, survival) require fundamentally different pricing approaches
• Make objectives specific, measurable, time-bound, and explicit about trade-offs