Price Setting System - Essay Example

Price setting system Name Institutional Affiliation Date Introduction The price setting process for any given organization is the most difficult and important decision that a manager or senior management team faces. The price concept usually has a major influence on both the consumer and shareholder value. In most cases, an expensive good or service is perceived to be of higher value. Considering the clothing industry as example expensive clothes are perceived to have been made from expensive fabric and manufacturing process to produce a high quality product but one must consider other organizations that offer the same apparel for a cheaper price. Organizations should be careful to ensure the price setting process offers for benefits for the organization rather than incur more costs (Hansen, Mowen & Guan, 2009). A price system affects the allocation of commodities and services with worth and using any form of money. Business organizations will always want to obtain maximum profitability and will therefore distribute more goods in a market that they are sure will buy them. The forms of currencies used in different nations do not matter as long as when Forex exchange is done the organization still records profit. All civilized societies use price systems to allocate resources but do not exclusively use it for all resource allocation decisions. Discussion Price systems have been in existence for as long as trade has been going on citing the days of barter trade to the present day when people use different currencies. Since its inception, the price system has transformed into the system of global capitalism that exists in the 21st century. Nations with a centralized planned economy such as the Soviet Union have controlled price systems whereby the government gets to decide the prices of commodities especially those that are considered basic to citizens. The different currencies used in any economic system and the criterion of a price system uses currency as a negotiator and in most cases a final decision made on whether something is done or not is based on the final value obtained. Very few things could get done without consideration for the cost or the potential of making profit in a price system. There would be no need to do business if no profit was going to be made (Oliver, 1999). A price system may be a free price system whereby prices are set by the forces of demand and supply and are unregulated. This is a situation whereby prices would be high when demand is high yet the supply is low while reverse is for prices to be low because of low demand when supply is high. A fixed price system is a situation where prices are set by the government usually for basic commodities such as food stuff or may be a combination of both that is a mixed price system whereby the market forces and government regulation combine. Pricing is a very ephemeral process meaning the once the decision is made to set a given price, they can be adjusted depending on changes in the market, legal and organizational operations. According to an Austrian school economist, Friedrich Hayek, the most effective price system is the free price system that permits economic coordination through price signals that changing prices transmit. Fluctuations in prices in most cases imply economic downturn or uplift usually depicted in products that are imported to a country. This is looked upon as one of the most influential and significant contributions to economics. The procedure of setting prices Step 1: the management team of any given organization in this case an apparel manufacturing company should decide on how much money they want to make from their business operations. Most people make their pricing decisions based on what they think the consumer is willing to pay, this should not be the case. By considering how much the organization wants to make, it’s a starting point because after all the business was established with the main objective of offering a decent living to its employees. It is therefore important to set prices that will enable your employees build a decent lifestyle without necessarily working around the clock. Step 2: pricing has to consider how many hours employees can work productively per week. Deciding on the number of hours to work in a week enables the management team to decide on how much money they would like to make per month and therefore design pricing around that knowledge (Jennex, 2007). Step 3: involves deciding on what strategy to use in setting a specific price (whether different or similar to competitors) and what the company needs to engage in (other operations apart from manufacturing) and what goods and services to offer in order to make the set numbers in step 2 work effectively. It is important to know what makes your goods and services stand out from competitors that make consumers willing to spend more that the standard price in the industry. It is evident that running a successful business and setting attractive prices is independent of the price. It considers what type of business and organization is trying to establish because setting prices that work for consumers and not for the business makes it hard for the organization to market itself and make the most out of its products. The business has to benefit its owners first, decide on what to charge consumers and finally decide on a differentiation strategy that will be worth the money you are asking consumers to pay. Measuring an organizations financial performance is also an essential aspect in pricing considering it is all about the money. The process involves having specific objectives. This would include introduction of measures of financial performance and position (financial efficiency, solvency, liquidity, repayment capacity and profitability), interpretation of the measures using benchmarks and description of calculations used (Neely, 2001). Using the example of an apparel manufacturing company, the management team could ask questions such as how liquid is the business, how efficient is the business, how adequate are the returns and how is the business financed? Bench marking involves comparing the business to other businesses that are established and best and to learn how they achieved success. The apparel manufacturing company should ensure that the minimal performance is above average. In most cases, financial benchmarks are derived from previous performance, projected performance and performance of similar organizations. Benchmark data can be obtained from organizational associations or other acceptable sources. Identifying the organization’s source of data would involve employing methods of summarization, the time when the data was collected and calculations used for performance measures. Profitability measures the extent to which a business generates profits from the use of management, capital, land and labor. These factors of production for the case of the apparel manufacturing company are measured by net manufacturing income from operations, rate of return on the company’s assets and equity and the operating profit margin. Liquidity refers to the organization’s ability to meet the financial obligations as they are presented due in the short term without interfering with the normal operations of the business. Liquidity is measured by the current ratio obtained by dividing the existing possessions by present burdens. Solvency is measured by debt to asset ratio, equity to asset ratio and debt to equity ratio. It gauges the organizations ability to clear all financial obligations if all assets are sold and to continue viable operations after monetary misfortune (Needles, Powers & Crosson, 2008). Financial efficiency measures the intensity with which the manufacturing company utilizes its property to create gross revenues and the efficacy of purchasing, production, financial decisions and product pricing. Financial efficiency is measured by interest expense ratio, asset turnover ratio, depreciation expense ratio, net manufacturing income ratio and operating expense ratio. Conclusion The discussion reveals that the price system is just but one of man’s formations that he has learnt to use after he came across it without comprehending it though more innovations have to be made to enable the best use of it. Price systems have made it possible for organizations to achieve division of labor and coordinated utilization of resources based on an equal division of knowledge. Organizations have to strive to have a greater competitive advantage and a price system is just but one strategy (Oliver, 1999). It would be appropriate to for the government, consumers and organizations to be in harmony and ensure each derive maximum benefits. Adequate research should be done to ensure the set price is well received in the market even if it takes some time for the organization to meet that need. References Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost management: Accounting and control. Mason, Ohio: South-Western. Jennex, M. E. (2007). Knowledge management in modern organizations. Hershey, PA: Idea Group Pub. Needles, B. E., Powers, M., & Crosson, S. V. (2008). Principles of accounting. Boston, MA: Houghton Mifflin. Neely, A. (2001). Business performance measurement: Theory and practice. Cambridge: Cambridge University Press. Oliver, L. (1999). The cost management toolbox: The manager's guide to controlling costs and boosting profits. New York: AMACOM. 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