EFFECT OF PRICING POLICY ON FIRMS PROFIT

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EFFECT OF PRICING POLICY ON FIRMS PROFIT

CHAPTER ONE

INTRODUCTION

BACK GROUND 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.

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.

(i) To establish the efficiency and effectiveness of pricing policy in selected firms.

(ii) To find out the various factors that influence pricing decisions in selected firms.

(iii) To determine if pricing decision (s) can make an impact on a firm’s profit and efficiency.

(iv) To investigate if profit planning (or budgeting) can result in cost reduction and increased profit performance.

(v) 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.

REFERENCES

Egbunike. P.A; (2007) Management Accounting” 1st Ed. onitsha, Frances New Dawn.

Hilton, W.R; (1991) “Managerial Accounting” 6th Ed. U.S.A, Voult Hoffmann Press Inc.

Kotter, P. and K.L. Keller (2006) Marketing Management. 1st Ed. New York, Pearson Prentice Hall Inc.

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