The Influence of Pricing on the Profit of a Firm

The Influence of Pricing on the Profit of a Firm

Literature Review:

Pricing decision is a decisive decision every organization has to make because this will affect the goals of the organization directly and indirectly. It deals with the methods of setting profitable and justifiable prices (Obegmi 2010). A firm’s pricing strategies may be based on costs, demand, or the prices of competing products (Beredugo & Etuk, 2014). From the various objectives of business organizations, the primary objective of any business enterprise is to maximize profit and minimize cost. Pricing decision arises in virtually all types of organizations, irrespective of their level of activities. Profit maximization is the main organizational goal for any profit making organization. To achieve this objective, price must be set strategically in such a way that maximizes revenue and minimizes cost. Every multinational business entity is set up with the primary objective of making profits and several considerations underlying their profit motive come to bear in determining the pricing of their goods between associated parties. Small business owners lacks of knowledge and skills of basic marketing planning and control, which thereafter leads to poor quality products, unawareness of competition, poor distribution and poor pricing methods. The poor pricing methods thereafter lead to poor product pricing, which will eventually affect sales (demand) and finally the profit of the business (Obegmi 2010).

According to Meehan et al the reason why pricing is the focus of an organization because its benefits are enormous. On Meehan’s et al scholarly book they concluded that pricing is the most powerful lever available to raise performance.

Imoleayo (2016) in his study which aimed at evaluating the various factors that influence pricing decision and how well an organization can manage these factors effectively to maximize profit. He cited some factors like cost of production, nature of market competition, customers and market segment, demand, consumer behaviour and perception, channel distribution, macroeconomics trend, company objective. On Adrian Micu and Angela Luiza Micu the only way to ensure profitable pricing is to reject early those ideas for which adequate value cannot be captured to justify the cost.  In Micu’s strategic pricing they established the idea that management take responsibility for establishing a coherent set of pricing policies and procedures, consistent with its strategic goals for the company. As they said renouncing responsibility for pricing to the sales force or to the distribution channel is renouncing responsibility for the strategic direction of the business.

(Irefin et al, 2013) Price is not expected to be static over a long period of time given changes in economic conditions and indicators such as, inflation, rising prices of other cost inputs and increasing general cost of living. Situations where a company’s factor input costs have been rising consistently for some years, but the company is unable to adequately adjust its prices to reflect these changes creates some serious challenges for such company’s survival and profitability. The challenge becomes more worrisome where the company’s inability to effect the desired price changes is caused by environmental imperatives beyond the company’s control.

In Omeleayo’s study in the three major backgrounds to the pricing theory he considered the Economists’ perspective, the Accountants’ perspective as well as from the Marketers’ perspective. The accountants have given a background look at the study at hand giving it a comparison to how well a relationship can be established between total cost, price and profit. The marketers are mainly concerned with how well price can be set to suit the value the customers will be willing to pay (customer satisfaction). The economists have provided much of the theoretical background to pricing. The theory states that firms should seek the price which maximizes profit and will thereby obtain the most efficient use of the economic resources held by the firm. From the Accountants’ point of view, pricing theory is based on the concept that a relationship can be established between price, quantity demanded, quantity sold and total revenue. Demand sympathizes with price and therefore varies with it, and if an estimate can be made of demand at different price levels it should be possible to derive a profit maximizing price, and a revenue maximizing price. Except if realistic estimates of demand at different price levels can be made, pricing theory is difficult to apply in practice.