Financial Decision Making

FINANCIAL
DECISION MAKING
STUDENT ID:
[Pick the date]

Question 1
Choosing the selling price is a strategic decision taken by a business. This is because it has
significant implications for the business. Firstly, it determines the profitability of the
business. This is because the profit would be computed by subtracting the cost price from the
selling price. Also, the competitive landscape would also be impacted by the choice of selling
price. This is especially the case when the underlying product is homogeneous is nature. If a
given firm chooses to sell the goods at a lower price than currently prevailing in the market,
then it is highly likely that the other players would also have to lower their prices so as keep
their market share intact (Bhimani et. al., 2016). Additionally, the selling price is imperative
with regards to the customer segment that the firm intends to target. This is because different
customers segments may be defined based on their respective purchasing power. The pricing
decision essentially highlights the customer segment which the company wants to target. For
instance, a car which is priced low would potentially be aimed towards budget or economy
customers while a luxury sports car would be priced to target the high wealth individuals.
Thus, choosing an appropriate price is pivotal for the success of any business. A wrong
choice in this regard may result in lower profits and loss of competitive position in the
marketplace (Parrino and Kidwell, 2014).
Question 2
One of the most popular pricing techniques is cost plus pricing. In this pricing mechanism,
the desired profit is added to the underlying cost of the good so as to arrive at the intended
selling price. As and when there are fluctuations in the cost, price may be revised upwards or
downwards. Another pricing technique is competition based pricing which essentially tends
to focus on offering the product at prices which are currently being charged by the
competitors or prevalent in the market. Thus the profit margins are based on the prevailing
prices in the market. Yet another type of pricing technique is predatory pricing which is
usually adopted by a new incumbent with the intent to disrupt the existing market and
players. In this the price set by the seller is significantly lower than the existing market price.
The price is intentionally set lower so that the other competitors are not able to compete and
hence the new entrant is able to make a mark in the industry by getting customers. Usually
predatory pricing is so low that the new incumbent would make huge losses as the products
are sold below cost (Petty et. al., 2016).
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