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1.1 BACK GROUND OF THE STUDY
In modern economies, prices are generally expressed in units of some form of currency. Although, prices could be quoted as quantities of other goods and services (BARTER SYSTEM). Prices are sometimes quoted in terms of vouchers such as trading stamps. Price sometimes refers to the quantity of payment requested by a seller of goods or services rather than the actual payment amount.
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.Pricing Policy
In many financial transactions, it is customary to quote prices in other ways. The requested amount is sometimes called the asking or selling price, while actual payment may be called the transaction or traded price.Pricing Policy
However in explaining the importance of pricing, Egbunike (2007:83) sustained that setting the price for an organizations.Pricing Policy
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….Pricing Policy.
1. Considerations Involved in Formulating the Pricing Policy:
The following considerations involve in formulating the pricing policy:
(i) Competitive Situation:
Pricing policy is to be set in the light of competitive situation in the market. We have to know whether the firm is facing perfect competition or imperfect competition. In perfect competition, the producers have no control over the price. Pricing policy has special significance only under imperfect competition.
(ii) Goal of Profit and Sales:
The businessmen use the pricing device for the purpose of maximising profits. They should also stimulate profitable combination sales. In any case, the sales should bring more profit to the firm.
(iii) Long Range Welfare of the Firm:
Generally, businessmen are reluctant to charge a high price for the product because this might result in bringing more producers into the industry. In real life, firms want to prevent the entry of rivals. Pricing should take care of the long run welfare of the company.
Pricing policies should be flexible enough to meet changes in economic conditions of various customer industries. If a firm is selling its product in a highly competitive market, it will have little scope for pricing discretion. Prices should also be flexible to take care of cyclical variations.
(v) Government Policy:
The government may prevent the firms in forming combinations to set a high price. Often the government prefers to control the prices of essential commodities with a view to prevent the exploitation of the consumers. The entry of the government into the pricing process tends to inject politics into price fixation.
(vi) Overall Goals of Business:
Pricing is not an end in itself but a means to an end. The fundamental guides to pricing, therefore, are the firms overall goals. The broadest of them is survival. On a more specific level, objectives relate to rate of growth, market share, maintenance of control and finally profit. The various objectives may not always be compatible. A pricing policy should never be established without consideration as to its impact on the other policies and practices.
(vii) Price Sensitivity:
The various factors which may generate insensitivity to price changes are variability in consumer behaviour, variation in the effectiveness of marketing effort, nature of the product. Importance of service after sales, etc. Businessmen often tend to exaggerate the importance of price sensitivity and ignore many identifiable factors which tend to minimise it.
(viii) Routinisation of Pricing:
A firm may have to take many pricing decisions. If the data on demand and cost are highly conjectural, the firm has to rely on some mechanical formula. If a firm is selling its product in a highly competitive market, it will have little scope for price discretion. This will have the way for routinised pricing.