Business strategy and pricing (Part 1)

ACCA P3考試：Business strategy and pricing

Mission and marketing objectives

Pricing is ultimately part of an organisation’s strategy and we should, therefore, go back to where strategic planning should begin: the organisation’s mission. There we will find the organisation’s purpose, its self-perception, its feeling about its position in the market, and material relating to the organisation’s culture and ethics. Pricing cannot be separated from mission.

For example:

• An organisation might have a charitable or not-for-profit purpose, in which case prices for its products and services might be zero or heavily subsidised.

• An organisation might perceive itself to be ‘up-market’, in which case it might have to charge high prices to project quality and exclusivity.

• Pharmaceutical companies face ethical issues when pricing their life-saving products for both rich markets where they hope to make profits, and for poor markets where there are ethical and social responsibility dimensions.

Pricing objectives

Whereas missions and marketing objectives tend to be long term, in the shorter term there can be a variety of pricing objectives. For example, profit-seeking organisations have to at least break even eventually and, if possible, prices have to be set to allow this. There is, for example, no

point in having a mission which is to be upmarket, and then trying to enforce that impression by having prices so high that sales volumes are negligible. Sometimes, the need to survive and bolster cash flows quickly will dictate massive price cuts. Sometimes an organization might reduce its prices, sustaining losses for a while, in the hope of forcing competitors to withdraw from the market.

Costs

In profit-seeking organisations, revenues have to exceed costs; in not-for profit organisations revenue has to match income. By this stage of your studies you should be well aware that any positive contribution (that is when marginal revenues exceed marginal costs) helps to cover fixed costs. To make a profit, revenue has to exceed all costs. What might become more relevant in strategic management is the importance of opportunity costs and of exit costs.

An opportunity cost is the revenue foregone as a result of a decision. If you build on a piece of land you cannot then sell the land for cultivation, for example, and the sale price foregone is an opportunity cost of the decision to build. Exit costs can arise when trying to abandon a strategy.

For example, in some countries large liabilities can be incurred if employees are made redundant. Sometimes clean-up or reparation costs can be triggered if undertakings are closed down. In such circumstances, it might be cheaper to carry on provided marginal revenues just exceed marginal costs. If competitors are in this position then we are likely to suffer great price pressure from them.