Essay on Pricing Decisions in Firms
Pricing is a critical component for a firm because of its close relation to the operations and performance of a business. It is the primary contributor to the profitability of a business.
Interestingly, firms in a perfect competition have no control in as far as pricing in the market is concerned. The greatest desire for a company is to be able to influence the activities taking place in the market in as far as pricing is concerned. Influencing market price implies that the business has acquired market power and therefore determine profit-maximizing markup used in setting the price of a product.
Price is one of the factors influencing the demand and supply of a product. At high prices, a company supplies more products because it is in a position to maximize profits. Additionally, consumers will consume more of a product at low prices. Equilibrium must, therefore, be established to guarantee that the producer and consumer are comfortable with the price set in the market. A company will always seek towards maximizing profit (Noble and Gruca). This is because the company must first meet the cost of production including paying for raw materials, employees, and other activities included in the production process. However, the price set should not aim at pushing the company to make abnormal profits because this will be unfair to the customers. Large companies have the ability to influence pricing but must ensure that the interests of the customers are incorporated when making the pricing decision.
Coca-Cola is one of the largest companies in the world in terms of profits and market share. The company supplies products to almost every market in the world, which proves its power in as far as pricing is, concerned (The Soda Wars ). Coca-Cola considers what its competitors are doing in as far as pricing is concerned and uses the information to price its products. The move aims at ensuring that the products are not too expensive compared to those provided by its competitors. Coca-Cola is interested in ensuring that its products are affordable to all customers across the market. As such, the company has been fluent and consistent in as far as pricing is concerned (The Soda Wars).
Coca Cola’s goal in pricing has been driven by the need to increase shareholder value without compromising the interests of the customer. Although the company is also interested in acquiring market share and dominate the market characterized by key competitors such as Pepsi, Coca-Cola adjusts prices in such a way they are affordable to the customers but still allow the company to dominate the market (The Soda Wars ).
Coca-Cola as a powerful company uses low pricing strategy when it wants to enter a new market. This is because, in such a market, customers are sensitive to the price of a commodity especially in cases where there are available substitutes (The Soda Wars). Once the company is strongly implemented, it adjusts prices in such a way that raises awareness of its brand while at the same pursue profitability. Firms should not charge the same price for their products because they are competing and therefore they each want to earn high profits. Pricing is closely related to marketing because in most cases, a customer will make the decision to buy a product based on the price. If the price of the product is higher compared to the available substitutes, the customer is likely to forego purchasing the product for another cheaper commodity.
After reading the article, I have learned that pricing decision is critical in determining the success of a company. A company adopts a pricing strategy that works for its products. Some companies may prefer to adopt a pricing strategy that allows the business to earn higher profits than it would earn if it charged a price for each unit sold while other companies like Coca-Cola prefer to compare their pricing with other competitors. The idea is to ensure that the company sets the correct pricing that guarantees profit maximization without overcharging the customer. Pricing will, in the long run, have a significant impact on quantity demanded and supplied.
Works Cited
Noble, Peter M., and Thomas S. Gruca. “Industrial pricing: Theory and managerial practice.” Marketing science 18.3 (1999): 435-454.
The Soda Wars. “Coca Cola Pricing Strategy,” (2012). Accessed from http://softdrinkcolawar.blogspot.com/2012/12/coca-cola-pricing-strategy.html
