Strategic Pricing Decisions Within Companies

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Strategic pricing decisions within companies Introduction Drury (2012) defines strategies as: “courses of action designed to ensure that the objectives are achieved”. This definition alone encompasses the importance of developing certain strategy in the early stages of production in a company; without strategy there is no clear path of how to achieve targets and most likely failure would follow. In this paper different strategic decisions and processes of pricing will be discussed. The author starts with exploring the economic model of pricing with evaluating its strengths and weaknesses. Further on, author looks at pricing from management accounting perspective and illustrates different models of pricing encompassed by Drury.…show more content…
The pricing model suggests that at the point where marginal revenue equals marginal costs (MR=MC) the goal is achieved and owner’s profits are maximised (Begg et al. 2011). By further investigating the model (see Figure 1) it is clear the firm wants to produce as much as possible to spread the fixed costs between produced units and yield a profit. Marginal revenue has to be equal with marginal costs because if the MC>MR the cost of every extra unit produced will be higher than what can be earned for it. Logically the price is set at the quantity demanded, but bearing in mind the point where MR=MC. And finally, the firm’s profit would be the difference between average costs and the actual price; TR-TC=profit. Figure 1 Economic Model of Pricing 1.2 Disadvantages Although this model is good for understanding the big picture of what companies are trying to achieve and serves as the base of other economic theories, it has disadvantages. The model involves a lot of assumptions and is ignoring certain factors. It looks at the firm in short-run instead of showing how to add value in order to survive in the long-run; it assumes that every consumer acts in a reasonable manner which sometimes is far from the real world. Moreover, competition is left out because the model is developed as if the firm has a monopoly in the market, thus operating in a perfect competition. Additionally the demand is subjective- very hard to actually measure; also companies can manipulate
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