PRICING AND ITS EFFECT ON COMPETITION-economics project topics online
For any organization that is involved in the production of goods and rendering of services, after answering the question what to produce, and who to produce for, there is need to answer the question how much will our potential customers be willing to pay for the good? This difficulty of price fixture and the other various intervening variables such as cost, competitors price, demand, political factors, environmental factors, etc involved in fixing price for goods and services, has posed a sense of concern to most small and medium enterprises in Nigeria. This work is aimed at finding an answer to some probing questions in the mind of manufacturers and managers of small and medium enterprises on how to price effectively combining all the various factors influencing pricing, as well as meeting the organizational overall objective, which is profit maximization.
Pricing decision is a crucial decision every organization has to make, because this will eventually affect their corporate objectives, either directly or indirectly (Monroe 2003:8). For every business entity, irrespective of their line of business and objective, cost minimization and profit maximization is a general factor to be considered and for non-profit making organizations, there will always be the need to reduce cost at all means and to maximize output. A business whether small or big, simple or complex, private or public, is created to provide competitive prices (Ayozie 2008:10). According to Hilton (2005:634), setting the price for an organization’s product or service is one of the most crucial decisions a manager faces, and one of the most difficult, due to the number of factors that must be considered. Some of the factors that influence pricing decision are demand, competitors, cost, political, environmental, legal and image-related issues. Horngren, et al (1996:428), buttresses this point by stating that managers are frequently faced with decisions on pricing and profitability of their products.
Some of the objectives of business enterprises vary from maximization of profit, minimization of cost, maximization of shareholders fund, becoming a market leader, etc. From the various objectives of business organizations, the primary objective of any business enterprise is to maximize profit and minimize cost, except for charity organizations that are set up primarily not to make profit, but there will be need to minimize cost by all means, therefore the need to set prices, which therefore connotes that pricing decision arises in virtually all types of organizations, irrespective of their level of activities. According to Lovelock & Wirtz (2004:151), the principal approach to an effective pricing strategy is to manage revenues in ways that support the firms’ profitability objectives, which leads to the question; how well can we complement the various factors that influence pricing decision, to achieve our overall objective, which is maximization of profit.
Small scale business in Nigeria constitute over 80 percent of all registered companies, occupying positions in agro based and allied industries, rubber based, leather shoes industries, chemical, electronics, general merchandising, restaurants, dress making, hair dress making, cane-chairs, leather products, pomade and toiletries, animal feeds and husbandry, printing, etc. They have accounted for a large percentage of all businesses and a favourable percentage of the nations’ gross national product. This fact is more relevant in the developed countries of Great Britain and United Kingdom where proper accounting system is kept (Ayozie 2008:10-15).
AIM OF STUDY
This study is aimed at evaluating the various factors that influence pricing decision and how well an organization can manage these factors effectively to maximize profit. The study focuses on the pricing policy decision of Small and Medium Enterprises in Nigeria, with a study of some selected Small and Medium Enterprises in Ogun, and Lagos State Nigeria. There are various definitions to the word Small and Medium Enterprises (SMEs), but for the sake of this study, SMEs are business enterprises with a maximum manpower of 300 workers, and Working Capital of N10million. This research work is divided into five sections, with the first section introducing the research work, section two reviews some of the related literatures that will help in the theoretical and conceptual analysis of the problem at hand, section three looks at the research methodology adopted as well as the statement of the research design. Section four of the work looks at the data analysis and presentation, while section five gives a brief summary of the research work and gives a concluding remark on the research work.
STATEMENT OF RESEARCH PROBLEM.
Decision is a choice between alternatives, having all the necessary information about the various alternatives available. Pricing decision is a decision that must be taken carefully, because of its nature and its effect on the overall goals and objectives of the organization, which is mainly profit maximization. Hilton (2005:633) reporting on the interview held with President Winston Darrough III, stated that the President noted that pricing is a sticky wicket, in which you keep an eye on the costs as well as the competitors. The competition will always be driving the price down, and there will be need to respond appropriately. You can’t sell the same product for more than the other bloke does. But at the same time, there’s need to cover costs of production. Nobody can indefinitely sell a product at less than its cost of production, because it doesn’t work that way. The stage of the product in its life cycle will determine the pricing decision for the product at hand. For new products, the target costing approach is used, in which the company estimates what they think consumers will pay for a new product, and then back out the cost that is in excess of it in order to sell at that price. This aspect of an organizations activity (pricing decision), is handled with mere guess work by most SMEs in Nigeria, with little consideration for some factors, which thereafter influences their decision making without weighing the cost and benefit of the decision made on pricing. This paper is aimed at looking at the various factors that influences pricing decisions, their effect on price and what the end result will be on profit appropriately.
OBJECTIVES OF THE STUDY.
At the end of the work, it is expected that the following objectives, which serves as the driving force behind the topic at hand will be achieved: evaluate the role of organizational objective in the pricing decision process, evaluate some of the factors that influence the product pricing policy an organization will adopt, evaluate the role the price of similar products (competition) on the pricing decision of an organization, evaluate the role the price of similar products on the attainment of the organizational objective.
The hypotheses below will be tested and conclusions drawn from the outcome.
H1: The change in price of a product has a significant impact on the organizational objective
H2: Pricing decision is dependent on the price of similar products
H3: The price of similar goods affects the attainment of organizational objective.
PURPOSE OF STUDY
Pricing will be looked at from the accountants’ point of view, which looks at how a relationship can be established between price and the various factors that affect it. This paper is structured such in a way that section two that follows introduction presents the literature review and the theoretical framework. Methodology is section three, section four presents the survey results and the discussion of the results, while section five is conclusion and implications.