Decision-makingis a key part of managing a business. Sometimes the situation getstricky, but production, promotion, and sales have to continue. Beforesettling on anything, a manager or the board regulating activities ofthe concerned businesses have to weigh all the available options andsettle for the most viable one. One of the decisions that firms haveto make from time to time is a price reduction or increment (Berman,2005). The financial aspect of the situation means that both thebusiness and the target clients will be affected by the move andthere must be a corresponding reaction. The factors that firms mustconsider before a price change are the center of discussion for thisessay.
Thecompetitors’ prices is a major focal point in making a decision toincrease or reduce prices. If there are other firms offering the sameproduct at a lower price in the case of substitutes, then thebusiness cannot raise its product prices. If it decides to hike thecost of the goods or services, the customers will shift to thecompetitors leading to losses. However, in the case of luxury goods,a firm may consider tuning the products and raising the prices shouldthe competitors lower theirs (Haynes, 2015). The demand for luxurygoods increases with a hike in prices. Competitors’ market rate isa fundamental part of a firm’s pricing decision.
Thecost of production is a primary consideration in the decision toincrease or lower prices. Every business’ aim is to make profits.Irrespective of what the competitors are charging, a firm cannot sellproducts or services below the production cost (Brickley et al.2016). Increased losses will lead to closure and bad debts. At worst,businesses have to equal their production cost when surveying themarket or conducting research. If the revenues cannot surpass theinput, then the math beats the logic of conducting business.
Pricingis a difficult part of businesses decision-making processes. Thereare many factors that management has to consider. The cost ofproduction and competitors’ market rate tops the priority list. Anydecision that the management makes must evaluate and analyze the twoto make meaning out of the final verdict.
Berman,B. (2005). Applying yield management pricing to your servicebusiness. Business Horizons, 48(2), 169-179.
Brickley,J. A., Smith, C. W., Zimmerman, J. L., & Brickley, J. A. (2016).Managerial economics and organizational architecture. Chicago: Irwin.
Haynes,W. W. (2015). Pricing decisions in small business. University Pressof Kentucky.