Pricing decisions as a management strategy

Pricing decisions as a management strategySupply and demand is an economic regulate of price determination in a market. It concludes that in a competitive market, price functions to equalise the quantity demanded to the quantity supplied. This results in an economic equilibrium. The Pricing decisions, decision making what to charge the customers may be based on the Marketing or Cost and management accounting. Pricing is one of the most difficult decisions faced by organisations. It is possible for management to foresee a profit squeeze (Horngren, Datar Foster, 2003). Pricing decisions are based on what to charge for the products and advantages organisations offer. These decisions sport major impacts on the revenue an entity earns.This study is focused on pricing decisions as a management strategy. It will then discuss about saluteing (subset of management accounting) and its mildew in pricing. Major changes have occurred in the business world in recent years, including deregul ation, privatisation, the growing expectations of share holders and the impact of new technology (Atrill McLaney, 2009). These changes have guide towards a fast changing and competitive environment, and this has radically changed the way that entities need to be managed. Managers must approach pricing decisions with care be get of the signifi tailt impact they apprise have on the advantageousness of business (Drury, 2008).Management must approach pricing decisions with care because of the significant impact they can have on the profitability of an entity. Managers consider three main influences on pricing decisions customers, competitors and cost. Managers tend to see the pricing issues through the customers eyes. Any increase in price may cause customers to reject an entitys product and switch to its competitors. In the current business environment, understanding customers prices and product preferences are a competitive advantage to any entity. Management can price dynamically to respond to demand, to create demand, to reduce waste and to turn over stock immediately. The reactions of competitors influence pricing too. Many companies globally, have established departments to face out information on its competitors financial performance, patents, technology and direct policies (Bhimani, 2008). Most companies price products to exceed the production costs (Alan, 2002). The surveys and case studies reveal that executives weigh customers, competitors and costs differently.Price taking and price makingMost entities need to make decisions about setting or accepting selling prices for their products or renovations. An entity will have to accept the market price under few circumstances. If there are entities in an industry and there is little to distinguish their product or service from each other then the management needs to consider price taking. Entities in commodity markets can be quoted as examples. Any small entity operating in an industry where there are dominant entities that influence prices then small entities will have to accept those prices. In contrast, if the entity is selling highly customized or differentiated products then they can influence the prices and be a price setter.Time horizons Short run and Long runPricing decisions have two short run and long run implications.Pricing decisions in short runShort run pricing decisions include pricing for a one-time(prenominal) special offer. This can be an opportunity where an entity will have to bid against its competitors. In such a situation incremental costs of undertaking the rule should be taken into account. Product mix could be adjusted where the incremental sales revenue exceeds incremental short run costs and will provide a contribution towards fixed costs.Pricing decisions in long runLong run decisions could include pricing a product in a major market where price setting has considerable leeway. Long run time horizon is mostly of a year or longer.Organisations are conjectural to consider the long run implications since they commit their resources for a lengthy period of time. Long run decisions have a profound effect on the firms afterlife position (Drury, 2008). Pricing decisions are more prominent since that is how organisations earn their revenues. Target costing and Life cycle costing are two of the strategies used by organisations in pricing.Target costing is the estimated price for a product or service that potential customers will pay. In other words, firms determine the allowable cost for the product or service, given a competitive market price, so the firm can earn a desired profit (Target cost = militant price Desired profit).Firms have two options to cut down costs to the level of target cost. It could be either by redesigning the product or service and or by integrating new manufacturing technology. While once managers focused only on manufacturing costs, they now look at cost upstream (before manufacturing investigate and de velopment and design) and downstream (after manufacturing marketing, distribution and customer service) in the product life cycle to get a complete analysis of product cost and profitability. some other long term pricing strategy is Life cycle costing. Typically, product or service costs are calculated and reported for shorter periods, such as a month or a year. Unlike the typical strategies Life cycle costing provides a long term perspective.