Managerial economics
Managerial economics generally refers to the different economic theories adopted by various firms concerning solving problems as well as making reliable decisions. Making reliable decisions is an essential aspect in every organization and a key function of its success. When it comes to decision making, pricing becomes one of the key aspects to consider since it is a tool of competition.
Pricing infers to the method of determining a firm’s expectation on what to receive in exchange for its commodities or service provided. Most firms use various pricing strategies when selling a commodity and the price is often set to increase profitability. A pricing strategy basically aims to take into account market conditions, trade margins, or input costs, customer’s ability to pay as well as competitor’s actions.
The chapter emphasizes how realistic and complex pricing influences a firm’s relationship with its customers. Ideally, when firms settle for prices that are fair or rather competitive, consumers tend to come back and this is prone to increases the profitability of the business. Further, making realistic and complex pricing is majorly influenced by both internal and external factors.
Since no business operates in a vacuum, how competitors react equally influences pricing decisions. A business, for instance, can be forced to lower its prices to be competitive. Similarly, if the business has no competitors it is more likely to set higher prices. Moreover, if the business as more knowledge of its competitor’s operating policies, technology, as well as plant capacity then it is capable of making more realistic pricing.
Making realistic pricing is also highly influential when a business has acquired a substitute product. The firm can opt to raise both the product prices to reduce price competition between them. Also, the firm can reposition the products to lessen substitutability between the products. This basically helps in providing a revised brand promise based on how customers associate with the product. However, if the business acquires complementary products, reducing the price of the products guarantees an increase in the demand for both products.
Additionally, organizations need to understand the market structure before pricing their products. If the demand for a product is uncertain and the costs of under-pricing the commodity is smaller than that of over-pricing, then, the organizations should opt to under-price and vice-versa. Further, if promotional spending makes the demand for a product to be more elastic, a firm can opt to reduce the price when promoting the product and vice-versa.
As an entrepreneur, my thoughts on pricing a product have been greatly enhanced in that I have understood that prices affect how consumers perceive the quality of the product. This means that most consumers view high priced products to be of high quality. Therefore, making deliberate and fair pricing is essential since consumers are also very sensitive to fairness. Also, since promotional spending affects the demand for a product in different ways, understanding how this works has greatly impacted my pricing decisions.
Ultimately, making complex and realistic pricing decisions is an essential aspect of every organization. This is because it determines and represents the marketer’s assessment of the value consumers see in a commodity as well as the price they are willing to spend on that commodity. Although perceived value is mostly in the consumer’s mind, a firm can influence this perception by positing the firm as a high-end brand and maximizing its level of service. Also, if a firm is hoping to sell more volume at a lower margin, it can position itself as a fair price alternative that is accessible to all.