Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions.
Highlighted hereunder are the reasons why pricing decisions should be based on both cost and market factors. Basically, it reviews the cost analysis and pricing decisions in one part and the influence that the law has on pricing decisions on the other part. Various important factors influence pricing. These factors encompass marketing, distribution, as well as advertisement. It is computed with respect to the contribution of customer concerning the firm’s product. The understanding of the consumers’ desire and need in a prospective segment is very vital for choosing the item as well as its cost or rate. The marketing sectors strategic plan together with better customer relationship so that a company’s financial objective is achieved. It is clear that pricing decision must be correlated with profit maximization. This is only possible if a larger market share is acquired.
The product’s brand is also a vital parameter in formulating a price tag for a given product. For instance, Rolls Royce is recognized in the automobile industry for charging premium price on its products. Premium pricing is however only applicable when a company is in a position to maintain its quality for premium tag in sustainable foundation for longer time-period.
Also, a sudden demand for an item determines its price for a shorter period. This is termed as price skimming. Organization’s objective is to solely target customers who are willing to pay higher for obtaining the goods early. However, ones the demand is saturated, prices go down so that more customers not willing to pay much are lured. Skimming pricing is advantageous in the sense that higher profits are gained via placing the product in a certain segments in a premium position and thus rapid recovery of costs consumed in inventory price as well as those of launching the product.
Penetration pricing strategy concept on the other hand sets the initial price lower so that a larger market share is gained. This strategy is helpful in attracting consumers who are very loyal to certain defined brands. Core objective of this strategy is to boost the sales volume in the market. This strategy is disadvantageous in the sense that there are numerous ambiguity factors. In a situation that a company is not in a position to recover fully the fixed costs by occupying a larger market share, it is unlikely to bear both distribution and production costs.
There are various laws for each country that governs prices of products in the market place. These rules are provided by the country’s attorneys. The rules normally formulated so that companies comply to constitute those that proves maximum retails price (MRP). The law also influences pricing decisions as it takes part in ceiling price control.
"It is impossible to use Discounted Cash Flow methods for evaluating investments in research and development. There are no cost savings to measure, and we don’t even know what products might come out of our R&D activities." This is a quote from an R&D manager who was asked to justify investment in a major research project based on its expected net present value. How would you respond to this statement? Do you agree or disagree? Explain.
This statement is based on sound assumption. Generally, predicting the cash flows generated from the investments in research and development is practically not easy. The concept of Discounted Cash Flow is normally applicable when evaluating the investment decisions on a firm’s expansion, research and development programs, acquisitions, replacements, renovations, etc.
The Discounted Cash Flow is in relation with a firm’s current investment, which, on the other hand, has the potential for better returns in the long run. When assessing whether an investment is worth considering, it is important to consider the time value of money and the risk premium, which are important characteristics of the Discounted Cash Flow. Compensation is normally done in cash should there be a delay in payment to the shareholders. In addition, should the cash flow fail to materialize, then, investors have option of more returns in the risk premium.
In most cases, the outcome of research, which results from the research and development programs, is surrounded by a lot of uncertainties. If the final product is good and attractive, then, it compensates for the investment since the patent price, the license issuing price for the use of the product, and the market price of the product are most likely to be high.
Be that as it may, investments in research and development results in more returns compared to the cost of capital if the investments are desirable. Therefore, predicting the possible outcomes of research and development activities and their most likely effects on a firm’s cash flow is worth the effort. The research and development plan needs to be based on a well-defined and clear way of measuring the projects with better returns.
Reference
Chadwick, Leslie. (1993). Management Accounting. Routledge.
Kotler, P. (2006). Marketing Management. Prentice Hall.
Tallon, P. P. et al. (2002). Using Real Options Analysis For Evaluating Uncertain Investments In Information Technology. Communications of the Association for Information Systems, Volume 9, 136-167.
