Impact Of Pricing Policy On Profitability Level Of An Organization

Project and Seminar Material for Business Administration and Management BAM

Abstract

This study was intended to evaluate the impact of pricing on profitability level of an organization. This study was guided by the following objectives; to establish the efficiency and effectiveness of pricing policy in selected firms. To find out the various factors that influence pricing decisions in selected firms. To determine if pricing decision (s) can make an impact on a firm’s profit and efficiency. To investigate if profit planning (or budgeting) can result in cost reduction and increased profit performance. To make recommendation based on the findings of this study to the management of firms.

The study employed the descriptive and explanatory design; questionnaires in addition to library research were applied in order to collect data. Primary and secondary data sources were used and data was analyzed using the correlation statistical tool at 5% level of significance which was presented in frequency tables and percentage. The respondents under the study were 42 employees of the cresent spring water and winco foam ltd Awka.

The study findings revealed that pricing policy of a firm has an influence on the degree to which firm can achieve optimum profitability; based on the findings from the study, efforts should be made by entrepreneurs in ensuring a profitable and competitive pricing policy.

Chapter One

Introduction

1.1 Background of Study

One of the most crucial operating decisions management must make is establishing a setting price for its products but this is quiet unfortunately that many firms are still mismanaging pricing causing lots of money and anticipated profit to be unexplored and wasted.

However in explaining the importance of pricing, Egbunike (2007:83) sustained that setting the price for an organizations product or service is one of the most difficult, due to some number of variety of factors that must be considered. The primary decision arises in virtually all types of organization, just to mention but a few of them such as manufacturers set prices for their products, they manufacture, merchandising companies set prices for their goods, service firms set prices for such services as insurance policies, bank loans etc.

A company’s survival and profitability depends upon its pricing decisions, thus price is the only element in the marketing mix that produce s revenue and thus ensures profit ability (kotler and keller 2006:475) Price adopted by firms must be able to cover all cost in the long run as well as to leave a profit margin to reward management.

The Price of a Product has a direct relationship with many operations of the firm’s activities. A price decision will affect demand and this in turn affects the revenue generated by the firm. Similarly, a firm which makes profit has the propensity of attracting more new capital. This shows that the public has confidence in the ability of the firm to yield return to them. So, the performance of management is usually measured by the amount of revenue it generates to satisfy the share holders of the organization.

It is evident that management has a big responsibility before them in setting and adopting the most advantageous pricing policy and the most effective profit plan for their firms, since prices are not set arbitrarily therefore management must focus on all the important factors in setting its price. Thus, it has become imperative to investigate the effectiveness of pricing policy and profit planning in Nigerian organizations.

1.2 Statement of the Problem

Hilton (1991:201) observed that both the market forces of demand and supply and the cost of production have a Significant bearing on determining prices. Equally he explained that there are other variables that influences pricing decisions according to him, this includes: Manufacturer’s pricing objective, economic situation, level of competition, and availability of close substitute.

For pricing to be effective, firms must incorporate all these factors in selecting the most advantageous price for it’s product. At times, firms are not in the habit of considering these factors and this has led to the shutting down of many factories, downsizing of workforce and in most cases, winding up of firm’s (Hilton, 1991:201).

Profit plan are made in form of budget and they help firms to forecast the level of profit, cost and revenue, they intend to generate in order to gain competitive advantage. Unfortunately many firms still do not prepare these plans, thus, this has led firms undertaking unplanned ventures resulting in escalation and inability of firms to foresee shortage in resources or finance or personnel needed in the future operation of the firm. Where no plans exist, there will be no basis for firm to compare or evaluate their performance.

Based on the foregoing, the problem of this study is in three (3) folds.

Firstly, the failure of some firms to incorporate factors such as economic situation, level of competition, availability of close substitute, among others in their pricing decisions, may have resulted to the minding up of several small scale manufacturing firm (SSMF) in Nigeria.

Secondly, it has been shown in accounting literatures that profit planning is a potential tool for achieving profit objectives and efficiency. which small scale manufacturing firms seems to ignore the use of profit planning ( or budget) in their operations. This has led to far reaching problem such as huge unforeseen operating cost as well as shortages in good financial and human resources.

Thirdly, and most importantly, the problem that stringated this study is the knowledge gap, that is, it looks as if small scale manufacturing firms are not aware that pricing policy and profit planning impact positively on profit performance.

1.3 Objective of the Study

This research is aimed at achieving the following objectives.

To establish the efficiency and effectiveness of pricing policy in selected firms.
To find out the various factors that influence pricing decisions in selected firms.
To determine if pricing decision (s) can make an impact on a firm’s profit and efficiency.
To investigate if profit planning (or budgeting) can result in cost reduction and increased profit performance.
To make recommendation based on the findings of this study to the management of firms.

1.4 Formulation of Hypotheses

To achieve the objective of the study, the following hypotheses are formulated.

Hypothesis One

Ho – Pricing Policy of a firm has no influence on the degree to which a firm can achieve optimum profitability.
Hi – Pricing Policy of a firm has influence on the degree to which a firm can achieve optimum Profitability.

Hypothesis Two

Ho – Effective profit planning has no effect on the profit performance of a firm.
Hi – Effective profit planning has a major effect on the profit performance of a firm.

1.5 Scope and Limitation of the Study

Since no single research can validly cover all areas of the topic the researcher tends that thrust of this project will be limited within the scope of how management’s performance of small scale manufacturing firms are influenced by the choice of its pricing policy and its profit planning. The study will focus primarily on small scale manufacturing firms in Anambra state Awka to be precise and its environs from where the manufacturing firms of this study are drawn to enable the researcher carryout on extensive investigation on this subject. The companies to be studied are: Crescent spring waters Awka and winco foam limited Agu Awka.

1.5.2 Limitation of the Study

The researcher is limited by time constraints. Since the semester is very short and has a bulk of academic exercise.

The researcher is also constrained by unavailability of funds required for an extensive research of this magnitude.

Finally and importantly, most small scale manufacturing firms that were studied lack adequate and organized accounting and decision making system, poor organizational chart and structure also their general unwillingness to corporate or give out information, all, these married the effectiveness of this research.

1.6 Significance of the Study

This research will serve as a guide to firms in setting the most advantageous pricing policy giving its individual unique situation which will enhance profitability in the short and long run situation. It will help them to avoid choosing arbitrary prices without considering its distinctive situation and important factors.

It will serve as a guide in choosing pricing strategy which strikes a balance between what the consumers wants to pay for a product and the price the firm is willing to sell; also this research will expose them (the firm) to the need for accounting information in carrying out this decision.

The research work will also be useful for the economy in the sense that if firms have substantial control over price setting, then their pricing behaviour can influence national output/income and hence community welfare.

Finally, the research work will be useful for those carrying on further research on this or related topic.

1.7 Definition of Terms.

Pricing Policy:

It is a guiding philosophy or course of action designed to influence and determine pricing decisions. Pricing policies set guidelines for achieving objectives.

Profit Plan:

The profit plan is the operating plan detailing revenue expenses and resulting to net income for specific period of time. It is the firm’s optimal plan in the light of management expectation in future.

Cost:

Expenses incurred to procure something which may be labour, material, facilities or resources

Efficiency:

Ability to work or produce well, without wasting time or resources.

Effectiveness:

Producing the intended result.

Fixed Cost:

Cost that remains constant within a level of production. It does not vary with production.

Marketing Mix:

The combination of the far primary element that comprises a company’s marketing programme which are price, product, place and promotion (advertising)/

Variable Cost:

They are cost that varies with level of production. They are constant per unit but vary with total production.

Strategy:

Strategy is a general statement of the vary in which an organization plans to achieve its objectives. The strategy contains the basic approach but not the details of how a firm plans to attain its objective.

Short Run:

It is a period of time that is less than one year. The firm is unable to vary all its input in this span of time.

Long Run:

It is a period of time sufficiently long to allow the firm to change the physical amounts of all resources in its production. It is usually five (5) years and above.

Chapter Five

Summary of Findings, Conclusion and Recommendation

5.1 Summary of Findings

From the analysis made in the previous chapter the following findings were made

Effective pricing policy has a major influence on the degree which a firm can achieve optimum profitability. We observed that for a pricing policy to be effective, it must incorporate relevant aspects of pricing decision which are cost data, estimated demand, consumers behaviour and competitors activities.
The test of the second hypothesis proves that effective profit planning has a major effect on the profit performance of a firm.
It was discovered that the knowledge of cost information is not the only key factor if a firm is to price effectively. More relevant to pricing decisions are the estimate of future demand and competitor’s achivities.
The researcher also discovered that though firms agree to the importance of demand estimation in price determination, yet it has not become a regular practice in some firms.
We found out that many firms are not in the habit of reviewing their prices in the light of changing circumstance such as inflation, changes in the cost of production, changes in consumers references, e.t.c
Analysis of data showed that competitors especially the big producers in the industry do not worry or react over price change (especially price slash) by small manufacturers. To them, they seem to be too insignificant in the market to cause a price war.
It was also discovered that many firms do not take corrective actions when there is a deviation from their profit plans.

5.2 Conclusion

The issue of planning policy and profit planning is a critical phenomenon in every profit making organization, since this will enhance the existence, survival, profit maximization and growth of the firm, mainly in the long run. This work can conveniently be concluded by saying that effectiveness of pricing policy and profit planning has a major influence in Nigerian Organizations, owing to the fact that any profit making manufacturing organization that wants to remain in the market, survive make profit and grow should give this issue attention through the use of qualified and competent personnel, adequate and effective information and planning, adequate and effective information and planning, regular cost audit and other tools, since it is the primary determinants of revenue generation (pricing), and cost control (profit planning), administrative efficiency and the overall profitability and growth of any business. This is very important because the market situation and economic environment is very turbulent and changes as the clock ticks.

5.3 Recommendation

The following are the recommendation which will help to improve pricing and profit planning in firms.

Pricing should be carried out by a joint effort between the top management and the sales personnel. These function should not be left alone to the top management because though they may be able to quote prices profitable to the firms, they will be unable to the quote prices that will be reasonable to the customers they the sales staff will be in a better position to do this.
Firms must state explicitly their pricing objective and every pricing policy adopted must be geared towards achieving those stated objectives also, the firm’s pricing objective must be in line with the firm’s overall objectives and not conflict each other. There must be a unity of purpose.
Firms should establish an information and survey department in order to obtain such information as will be necessary in order to gain control over changing pricing situation, since the price setting environment is very dynamic. Such information as relating to changing situation as cost, consumers testes and preferences, competitors activates. Other information relates with products ceiling price, price elasticity and other relevant information that will enable the firm to make effective pricing decision.
Manufacturer should consistently deliver more value at moderate price because the price a consumer is willing to pay for a product is that value he/she places on the product. Therefore, firms must improve value in the creation (product development), communication (selling) and delivery execution after sales service) stage of the product life. When a customer is satisfied he may be willing to accept reasonable increase in prices for greater satisfaction.
Periodic audit should be conducted on cost structure of all the firms product both major and minor. Firms should look for cost saving opportunities and to reap economics through joint operating cost. Clear cut methods of cost accumulation should be established and all cost should be covered hidden cost should be sought out. Firms must try to anticipate which cost may be raised more rapidly in the near future and must be alert to ways of cost reduction through substitution and elimination.
Firms should exploit product life cycle. The should use or employ different pricing strategies at different periods of the product life cycle. Depending on the nature of the product and the market response, new product many command special higher prices, older ones that have reached maturity and saturation stages of the (especially price slash) by small manufacturers. To them, they seem to be too insignificant in the market to cause a price war.

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