Abstract
The research analyzed the role
of product pricing on business failure in Nigeria, using NB PLC Enugu as a case
study. The research methods adopted were survey research design and oral
interview. Twenty three workers completed and returned their questionnaires.
The questionnaires were analyzed using descriptive and chi-square statistical
tools. Some of the findings were that majority of the managers are women, of
middle age and well educated and that the sub-sector is contributing
significantly to economic empowerment and employment generation. Additionally,
it was discovered that management inexperience in product pricing, increasing
cost of factor inputs where price is constant, intermittent price war and
consumers’ resistance to price increases all have significant relationship with
business failure. The conclusions indicated among others, that appropriate
product pricing is a key management function which if inappropriately handled
could result in business failure.
CHAPTER 1
INTRODUCTION
For
any organization that is involved in the production of goods and rendering of
services, after answering the question what to produce, and who to produce for,
there is need to answer the question how much will our potential customers be
willing to pay for the good? This difficulty of price fixture and the other
various intervening variables such as cost, competitors price, demand,
political factors, environmental factors, involved in fixing price for goods
and services, has posed a sense of concern to most small and medium enterprises
in Nigeria.
Pricing
decision is a crucial decision every organization has to make, because this
will eventually affect their corporate objectives, either directly or
indirectly (Monroe 2003:8). For every business entity, irrespective of their
line of business and objective, cost minimization and profit maximization -are
the general factors to be considered and for non-profit making organizations,
there will always be the need to reduce cost at all means and to maximize
output. A business whether small or big, simple or complex, private or public,
is created to provide competitive prices (Ayozie 2008:10). According to Hilton
(2005:634), setting the price for an organization’s product or service is one
of the most crucial decisions a manager faces, and one of the most difficult,
due to the number of factors that must be considered. Some of the factors that
influence pricing decision are demand, competitors, cost, and political,
environmental, legal and image-related issues. Horngren, et al (1996:428),
buttresses this point by stating that managers are frequently faced with
decisions on pricing and profitability of their products.
It
has been said that one of the secrets to business success is pricing your
products properly. If you price your products correctly, that can enhance how
much you sell, and contribute in creating the foundation for a business that
will prosper. However,should you get your pricing strategy wrong, you may then
create problems that your business may never be able to overcome. Put
differently, inappropriate product pricing is an invitation to business
failure, which refers to a company ceasing its operations following its
inability to make a profit or to bring in enough revenue to cover its expenses.
The final step is always that the business runs out of cash, which has been
said to define business failure (Moen, 2001-10).
Some
of the objectives of business enterprises vary from maximization of profit,
minimization of cost, maximization of shareholders fund, to becoming a market
leader,. From the various objectives of business organizations, the primary
objective of any business enterprise is to maximize profit and minimize cost,
except for charity organizations that are set up primarily not to make profit,
but there will be need to minimize cost by all means, therefore the need to set
prices, which therefore connotes that pricing decision arises in virtually all
types of organizations.
This
work is aimed at finding an answer to some probing questions in the mind of
manufacturers and managers of small and medium enterprises about the role of
product pricing on small and medium enterprises and how the pricing lead to the
failure of small and medium enterprises in Nigeria. Combining all the various
factors, as well as meeting the organizational overall objective, which is
profit maximization, and also how to prevent it.
1.1.
Statement of Research Problem
Decision
is a choice between alternatives, having all the necessary information about
the various alternatives available. Pricing decision is a decision that must be
taken carefully, because of its nature and its effect on the overall goals and
objectives of the organization, which is mainly profit maximization. Hilton
(2005:633) reporting on the interview held with President Winston.
DarroughIII,
stated that the President noted that pricing is a sticky wicket, in which you
keep an eye on the costs as well as the competitors. The competition will
always be driving the price down, and there will be need to respond
appropriately. You can’t sell the same product for more than the other bloke
does. But at the same time, there’s need to cover costs of production. Nobody
can indefinitely sell a product at less than its cost of production, because it
doesn’t work that way. The stage of the product in its life cycle will
determine the pricing decision for the product at hand. For new products, the
target costing approach is used, in which the company estimates what they think
consumers will pay for a new product, and then back out the cost that is in
excess of it in order to sell at that price. This aspect of an organizations
activity (pricing decision), is handled with mere guess work by most SMEs in
Nigeria, with little consideration for some factors, which thereafter
influences their decision making without weighing the cost and benefit of the
decision made on pricing. This paper is aimed at looking at the various factors
that influence pricing decisions and the role the product pricing which lead to
the failure of small and medium enterprises in Nigeria.
1.2.
Objectives of the Study
The broad objective of the study is to determine the
role of product pricing on small and medium scale enterprise (SMEs) failure in
Nigeria
and the specific objectives are:
1.
To examine whether management
inexperience in appropriate product pricing may result in business failure.
2.
To investigate whether producers‟ inability to
reflect increases in the price of factor inputs in product prices contribute to
business failure.
3.
To evaluate whether price-war
among producers can orchestrate business failure.
4.
To investigate if customers‟
resistance to price increases can cause business failure.
1.3 RESEARCH
QUESTIONS
In order to
address the above stated problem, the following research are essential, hence
they are reflected in the questionnaire.
1.4 RESEARCH
HYPOTHESIS
Ho: There is no
significant relationship between management inexperience in appropriate product
pricing and business failure
Ho: There is no
significant relationship between price-war among competing Firms and business
failure Ho: There is no significant relationship between consumers‟ resistance
to price increases and business failure
1.5.
SIGNIFICANCE OF THE STUDY
Information
gathered from the study could be used by Managers of Small and medium Scale Enterprises
for planning appropriate measures for business growth and survival as well as
the effective allocation of resources. To students in every higher institution
of learning, it will provide them with some vital information concerning
strategies for SME survival. Also, it will provide basis for which further
research could be conducted. Finally, it is believed that this research study
will be of great use to general public by expanding their knowledge on SMEs and
how to identify course of failure due to pricing policies.