Effectiveness of Pricing Policy and Profit Planning in Nigerian Organizations: A Performance Appraisal of Some Selected Manufacturing Firms

1.1 Introduction

Businesses today all face the challenge of how to maximize shareholders’ returns while also remaining competitive and relevant in a volatile and ever-changing market. The drive to maximize profits and retain a position in the market imposes a number of duties on managers. One of their major responsibilities is to make pricing decisions. The ultimate goal of any pricing decision is to enable an organization to achieve its objectives, and these may vary depending on the nature of the business. The use of various pricing practices as a management tool in steering an organization towards the achievement of set goals and objectives becomes more pronounced during the period of transition from a barter economy to a money-based market system. The use of the various pricing practices by management to improve their organization’s performance and sustainability is still very low in Nigeria.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of technical terms.

1.2 Background of Study

One of the most crucial operating decisions management must make is establishing a setting price for its products but this is quiet unfortunately that many firms are still mismanaging pricing causing lots of money and anticipated profit to be unexplored and wasted. However in explaining the importance of pricing, Egbunike (2007:83) sustained that setting the price for an organizations product or service is one of the most difficult, due to some number of variety of factors that must be considered. The primary decision arises in virtually all types of organization, just to mention but a few of them such as manufacturers set prices for their products, they manufacture, merchandising companies set prices for their goods, service firms set prices for such services as insurance policies, bank loans etc.

A company's survival and profitability depends upon its pricing decisions, thus price is the only element in the marketing mix that produce s revenue and thus ensures profit ability (kotler and keller 2006:475) Price adopted by firms must be able to cover all cost in the long run as well as to leave a profit margin to reward management.

The Price of a Product has a direct relationship with many operations of the firm's activities. A price decision will affect demand and this in turn affects the revenue generated by the firm. Similarly, a firm which makes profit has the propensity of attracting more new capital. This shows that the public has confidence in the ability of the firm to yield return to them. So, the performance of management is usually measured by the amount of revenue it generates to satisfy the share holders of the organization. It is evident that management has a big responsibility before them in setting and adopting the most advantageous pricing policy and the most effective profit plan for their firms, since prices are not set arbitrarily therefore management must focus on all the important factors in setting its price. Thus, it has become imperative to investigate the Effectiveness of Pricing Policy and Profit Planning in Nigerian Organizations.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Manufacturing Firms Effectiveness of Pricing Policy and Profit Planning in Nigerian Organizations.

1.3 Statement of Problems

Investigation revealed that Profit plan are made in form of budget and they help firms to forecast the level of profit, cost and revenue, they intend to generate in order to gain competitive advantage. Unfortunately many firms still do not prepare these plans, thus, this has led firms undertaking unplanned ventures resulting in escalation and inability of firms to foresee shortage in resources or finance or personnel needed in the future operation of the firm. Where no plans exist, there will be no basis for firm to compare or evaluate their performance.

Based on the foregoing, the problem of this study is in three (3) folds.

Firstly, the failure of some firms to incorporate factors such as economic situation, level of competition, availability of close substitute, among others in their pricing decisions, may have resulted to the minding up of several small scale manufacturing firm (SSMF) in Nigeria.

Secondly, it has been shown in accounting literatures that profit planning is a potential tool for achieving profit objectives and efficiency which small scale manufacturing firms seems to ignore the use of profit planning ( or budget) in their operations. This has led to far reaching problem such as huge unforeseen operating cost as well as shortages in good financial and human resources.

Thirdly, and most importantly, the problem that stringated this study is the knowledge gap, that is, it looks as if small scale manufacturing firms are not aware that pricing policy and profit planning impact positively on profit performance.

1.4 Aim and Objectives of Study

The aim of the study is to appraise Manufacturing Firms' Effectiveness of Pricing Policy and Profit Planning in Nigerian Organizations. In achieving this aim, the following specific objectives were laid out as follows:

1. To investigate if profit planning (or budgeting) can result in cost reduction and increased profit performance;
2. To establish the efficiency and effectiveness of pricing policy in selected firms;
3. To find out the various factors that influence pricing decisions in selected firms;
4. To determine if pricing decision(s) can make an impact on a firm's profit and efficiency; and
5. To make recommendation based on the findings of this study to the management of firms.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Can profit planning (or budgeting) result in cost reduction and increased profit performance?
• Can pricing decision(s) make an impact on a firm's profit and efficiency?
• What is the efficiency and effectiveness of pricing policy in selected firms?
• What are the various factors that influence pricing decisions in selected firms?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: Pricing Policy of a firm has no influence on the degree to which a firm can achieve optimum profitability.
• H1: Pricing Policy of a firm has influence on the degree to which a firm can achieve optimum Profitability.

Hypothesis Two

• H0: Effective profit planning has no effect on the profit performance of a firm.
• H1: Effective profit planning has a major effect on the profit performance of a firm.

1.7 Significance of Study

This research will serve as a guide to firms in setting the most advantageous pricing policy giving its individual unique situation which will enhance profitability in the short and long run situation. It will help them to avoid choosing arbitrary prices without considering its distinctive situation and important factors.

It will serve as a guide in choosing pricing strategy which strikes a balance between what the consumers wants to pay for a product and the price the firm is willing to sell; also this research will expose them (the firm) to the need for accounting information in carrying out this decision.

The research work will also be useful for the economy in the sense that if firms have substantial control over price setting, then their pricing behaviour can influence national output/income and hence community welfare.

Finally, the research work will be useful for those carrying on further research on this or related topic.

1.8 Scope of Study

The scope of the research is focused on the Performance Appraisal of Some Selected Manufacturing Firms Effectiveness of Pricing Policy and Profit Planning in Nigerian Organizations using Crescent Spring Waters Awka and Winco Foam Limited Agu Awka, Anambra State as a case study.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Research material: availability of research material is a major setback to the scope of the study.
4. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
5. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

Pricing Policy: It is a guiding philosophy or course of action designed to influence and determine pricing decisions. Pricing policies set guidelines for achieving objectives.

Profit Plan: The profit plan is the operating plan detailing revenue expenses and resulting to net income for specific period of time. It is the firm's optimal plan in the light of management expectation in future.

Cost: Expenses incurred to procure something which may be labour, material, facilities or resources

Efficiency: Ability to work or produce well, without wasting time or resources.

Effectiveness: Producing the intended result.

Fixed Cost: Cost that remains constant within a level of production; it does not vary with production.

Marketing Mix: The combination of the far primary element that comprises a company's marketing programme which are price, product, place and promotion (advertising).

Variable Cost: They are cost that varies with level of production. They are constant per unit but vary with total production.

Strategy: Strategy is a general statement of the vary in which an organization plans to achieve its objectives. The strategy contains the basic approach but not the details of how a firm plans to attain its objective.