EFFECTIVENESS OF PRICING POLICY AND PROFIT PLANNING IN NIGERIAN ORGANIZATIONS
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EFFECTIVENESS OF PRICING POLICY AND PROFIT PLANNING IN NIGERIAN ORGANIZATIONS
Chapter one
INTRODUCTION
1.1 Background of Study
One of the most important operational decisions that management must make is establishing a predetermined price for its products, but sadly, many organisations continue to mismanage pricing, resulting in a large amount of money and projected profit going untapped and wasted.
However, in explaining the importance of pricing, Egbunike (2007:83) stated that setting the price for an organization’s product or service is one of the most challenging tasks due to the wide range of elements that must be considered.
The primary decision arises in virtually all types of organisations, to name a few: manufacturers set prices for the products they manufacture, merchandising companies set prices for their goods, and service firms set prices for services such as insurance policies and bank loans.
A company’s existence and profitability are dependent on its pricing decisions, therefore price is the sole ingredient in the marketing mix that generates revenue and hence ensures profit ability (Kotler and Keller 2006:475). Firms must set prices that cover all costs in the long run while still leaving a profit margin to reward management.
The price of a product is directly related to numerous aspects of the firm’s actions. A price decision influences demand, which affects the firm’s revenue. Similarly, a profitable corporation is more likely to attract new funding.
This demonstrates that the public is confident in the firm’s potential to provide a return on investment. So, management performance is usually judged by the quantity of income generated to please the organization’s shareholders.
It is clear that management bears a significant duty in developing and implementing the most advantageous pricing policy and profit plan for their companies;
because prices are not set arbitrarily, management must consider all relevant aspects when choosing its price. As a result, it has become critical to study the efficiency of pricing policies and profit planning in Nigerian businesses.
1.2 Statement of the Problem
Hilton (1991:201) found that market dynamics of demand and supply, as well as manufacturing costs, have a significant impact on price determination.
He also explained that other aspects influence pricing decisions, including the manufacturer’s pricing objective, economic position, level of competition, and availability of a close substitute.
For pricing to be effective, firms must consider all of these criteria when determining the best price for their product. enterprises are not always in the habit of addressing these variables, which has resulted in the closure of numerous factories, reduction of workforces, and, in most cases, the liquidation of enterprises (Hilton, 1991:201).
Profit plans are created in the form of budgets and assist businesses in forecasting the level of profit, cost, and revenue that they expect to make in order to obtain competitive advantage.
Unfortunately, many organisations continue to fail to establish these plans, which has led to firms embarking on unplanned endeavours, leading in escalation and the inability of enterprises to anticipate a scarcity of resources,
financing, or manpower required in the firm’s future operations. Without planning, there is no way for a company to assess or evaluate its performance.
Based on the aforementioned, the challenge in this study is threefold.
For starters, the failure of some enterprises to consider considerations such as the economic condition, level of competition, and availability of near substitutes, among others, in their pricing selections may have led in the demise of some small scale manufacturing firms (SSMF) in Nigeria.
Second, accounting literature has demonstrated that profit planning is a potentially useful instrument for reaching profit goals and increasing efficiency.
Which small-scale manufacturing companies appear to overlook the use of profit planning (or budgeting) in their operations? This has resulted in far-reaching issues such as massive unplanned operating costs and a lack of adequate financial and human resources.
Third, and most crucially, the problem that underpins this study is a knowledge gap, which appears to be a lack of awareness among small-scale manufacturing enterprises that pricing strategy and profit planning have a beneficial impact on profitability.
1.3 OBJECTIVE OF THE STUDY
The aims of this study are as follows.
(i) To assess the efficiency and effectiveness of pricing policies in chosen enterprises.
(ii) Identify the key elements that influence pricing decisions in selected firms.
(iii) Determine whether pricing decision(s) have an impact on a firm’s profit and efficiency.
(iv) Determine whether profit planning (or budgeting) can result in cost savings and improved profit performance.
(v) Make recommendations to firm management based on the results of this study.
1.4 Formulation of Hypotheses.
To meet the study’s goal, the following hypotheses are proposed.
Hypothesis one.
Ho – A firm’s pricing policy has no bearing on its potential to attain maximum profitability.
Hi – A firm’s pricing policy influences its capacity to attain optimum profitability.
Hypothesis two
Ho: Effective profit planning has no effect on a firm’s profit performance.
Hi- Effective profit planning has a significant impact on a company’s profitability.
1.5 Scope and Limitations of the Study
Because no single study can validly cover all aspects of the problem, the researcher anticipates that the focus of this project will be confined to how management’s performance of small-scale manufacturing enterprises is influenced by the choice of pricing policy and profit planning.
The study will largely focus on small-scale manufacturing enterprises in Anambra state, specifically Awka, and the surrounding areas from where the manufacturing firms in this study are sourced,
allowing the researcher to conduct thorough research on this issue. Crescent Spring Waters Awka and Winco Foam Limited Agu Awka are the companies being researched.
1.6 Significance of the Study
This study will assist firms in determining the most effective pricing policy for their specific scenario, hence increasing profitability in the short and long run. It will assist them in avoiding making arbitrary pricing decisions without evaluating the unique circumstances and key aspects.
It will act as a guide in selecting a pricing strategy that strikes a balance between what consumers want to pay for a product and the price the firm is willing to sell; also, this research will educate them (the firm) on the importance of accounting information in making this decision.
The research will also benefit the economy since if enterprises have significant control over price setting, their pricing behaviour can influence national output/income and thus societal welfare.
Finally, the research findings will be valuable to individuals conducting additional research on this or comparable topics.
1.7 Definition of Terms.
price POLICY: A guiding philosophy or plan of action intended to affect and govern price decisions. Pricing policies establish parameters for achieving objectives.
PROFIT PLAN: The profit plan is an operating plan that details revenue expenses and the resulting net income over a certain time period. It is the firm’s ideal plan in light of management’s future expectations.
COST: Expenses incurred to obtain something, which can be labour, materials, facilities, or resources.
EFFICIENCY: The ability to labour or create efficiently, without wasting time or resources.
EFFECTIVENESS: Achieving the desired result.
FIXED COST: A cost that remains constant over a given amount of production. It does not change with output.
MARKETING MIX: The mix of the far basic elements that compose a company’s marketing strategy, namely price, product, place, and promotion (advertising).
VARIABLE COST: These are costs that change with the level of production. They remain constant per unit but vary with total production.
STRATEGY: Strategy is a general declaration of how an organisation intends to attain its goals. The strategy includes the broad approach but not the specifics of how a company intends to achieve its goal.
SHORT RUN: A duration of less than one year. The firm is unable to change all of its contributions in this time frame.
LONG RUN: A time period long enough for the firm to adjust the physical quantity of all resources used in manufacturing. It is usually five years or older.
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