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IMPACT OF PRICING
POLICY ON PROFITABILITY LEVEL OF AN ORGANIZATION
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.
IMPACT OF PRICING POLICY ON PROFITABILITY LEVEL OF AN
ORGANIZATION
CHAPTER ONE
INTRODUCTION
1.1 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.
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.
(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.
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