Long-Term Investment Decisions

Introduction

Pricing stands as the most crucial business tools available that managers can manipulate so as to achieve business results. Pricing as a subject has in the past received little investigation and academic attention, especially the value-based pricing (Hinterhuber, 2004). Pricing proves critical in the marketing and business decision-making phases since research has shown that a five percent increase leads to a twenty-two percent improvement in business profit as compared to a similar ten percent increase in business turnover. There are some reasons pricing fails to attract interest amongst business owners. First, the business owners do not have the confidence that they can modify the pricing structure effectively. Second, the business owners believe that pricing is a zero-sum game that is hard to win.

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Price Strategy as a Crucial Business Performance Determiner

In light of these actions by business owners, many scholars and business advisors understand the role that pricing and its impact on business survival and profitability. Price possesses a unique place among marketers due to its close association with business profitability and its flexibility. In the present paper, the aim is to describe a price strategy that will make the low calorie frozen microwavable food products less price elastic. The objective is to raise prices while maintaining demand for the products, which can be termed as luxury products according to economics theory (Hinterhuber, 2004). The paper theorizes that value-based pricing will assist the business to realize the goal set. You will learn more about this topic in our cause and effect essay topics guide.

Price and Income Elasticity of Demand

Price and income elasticity of demand have an enormous impact on the company`s pricing decision since it measures the changes in demand levels as a result of changes in income and price (Toytari et al., 2015). The elasticity of different products varies; hence, in turn influence the price making decisions. The law of demand states that the request for a product is high when the price is low and when consumer`s income is low. The reverse is also true.

The price elasticity of demand metrics measures how the demand for a product shifts as a result of price changes made by business owners (Toytari et al., 2015). Some general rules determine the price elasticity of demand as either being elastic or inelastic. Goods and services that are necessities for survival are inelastic while luxury goods tend to be price elastic in nature. For instance, if fuel prices increase the demand will not shift as much since it is a necessary component in transportation and manufacturing. Price elasticity is also dependent on the available substitute goods. For instance, the low calorie frozen microwavable food has many substitutes hence the demand will tend to be more elastic. In addition to this, there exist other factors such as narrowly defined markets tend to be more flexible than broadly defined markets.

Value-Based Pricing versus Cost-Based Pricing

There exist many pricing strategies that the food company can adopt such as the traditional pricing that focuses on competition, cost, and the market. Modern pricing methods such as price discrimination, limit pricing, psychological pricing and value-based pricing also prove to be viable. The paper recommends the use of value-based pricing since it fits the requirements of the market. Cost based pricing means that the price of a food product is determined by what it costs to make the product. The method has been the most popular in history due to the readily available information (Toytari et al., 2015). While the method is simple to use, cost pricing also includes the addition of profit, and the company must persuade customers that the price is appropriate. That limits the methods as being effective to make the food products less elastic.

Value-based pricing involves encouraging the customers that the price charged for the commodity is lower compared to its perceived quality. The pricing is decided as the products perceived value by the client, which is the difference between the price paid and the net benefits. The subjective nature of determining the customer`s value perception makes the method difficult to predict. It involves the need to understand and influence the customer`s desired value, which is difficult. Since it is challenging to determine the value of the food product, a methodology tool has been devised that can assist the enterprise access the real value of the product (Macdivitt & Wilkinson, 2010).

The value decoder breaks down the product to various components such as competitors, substitutes, income, environmental factors, and demand that are always determining the product`s value in the customer`s minds. Once the value of the components has been devised the managers can use them to devise the foods value while translating it to price. The components include the price and availabilities of substitutes, characteristics of products competitors, income, the strengths and demand of competitor products and the market environment.

The rationale for adopting value-based pricing as opposed to other strategies such as competition or cost based pricing has to do with the psychological aspects of consumers. The aim of the pricing will be to appeal to the emotions of the buyers (Macdivitt &Wilkinson, 2011). By providing the food products at a price that is conversant with the value pegged by the consumers, the price elasticity of the products will reduce. A price increase will not affect demand as such due to the value pegged by the users of the product. More so, the higher prices will increase the profitability levels of the company due to higher turnover.

Effects of Government Policies on Employment and Production

Governments establish many regulations and rules that guide businesses within their jurisdictions. Businesses just like individuals’ change the manner in which they operate when the government changes the rules. The regulations are in the form of policies that influence the profitability and competitiveness of the business. In macroeconomics theory, fiscal policy is the most widely highlighted policy that the government uses to affect the aggregate demand hence employment and output levels in the economy. In that light, the present paper discusses the effects of these government policies on the employment and production levels in the economy.

Fiscal policy is a government`s decision regarding taxation and spending in the economy. The economy is characterized by booms and recessions that significantly affect employment and productivity levels hence the necessity of fiscal and monetary policy to smooth out the economic bumps. When the government wants to stimulate economic growth, it can use expansionary fiscal policy that involves increased government spending or a reduction in taxation levels (D`Souza, 2009).

When the government increases spending in the economy, it directly purchases goods and services produced in the economy hence directly increasing the demand for goods and services. Since aggregate demand in the economy has grown, production must go up as well. The increased production levels required will require labor hence higher employment opportunities in the economy. The unemployed can now acquire jobs and also have money to spend on goods and services. Expansionary fiscal policy can also be applied to reducing taxes.

According to the Keynesian economists, the expansionary fiscal policy has the effect of increasing output in the economy due to an increase in the aggregate demand. If the government reduces the taxes payable by business and individuals, then the theory assumes that these economic agents will use these extra disposable incomes to buy more goods and services. The increased aggregate demand in the economy will stimulate the economy to produce more goods and services hence enabling more output and productivity.

These government`s fiscal policies can result to a phenomenon caused crowding out (D`Souza, 2009). The crowding out effect occurs when the higher income levels lead to increased money demand causing the interest rates to rise. Investments fall as a result of high-interest rates hence leading to a lesser effect on investment since it stands as one of the components of aggregate demand. When the government undertakes an expansionary fiscal policy, the company could face high-interest rates that have an effect of reducing investments that can be made by the low calorie frozen microwaveable food company. In the wake of tightened money markets, the firm will face high-interest rates on borrowed funds.

Is Government Regulation Required To Ensure Fairness In The Healthy Food Industry?

Government regulation is necessary in the healthy frozen food industry so as to prevent the monopolization of the industry. Just like any other industry, there is the ever eminent risk of monopolization that can occur as a result of entry by multinationals, mergers or acquisitions. Economists consider monopolies as being unfair since those firms use their monopoly power to dictate prices that therefore create market inefficiencies (Spitzer, 2011). Given that the food company under assessment is not the only frozen food company, there exists heightened competition if a merger between competitors in the industry occurs.

In a free market, the scarce resources available are allocated through a price mechanism in which the spending decisions and preferences of consumers and the supply by businesses determine the equilibrium prices. Hence, in this system, demand and supply affect price levels in the market. However, since the free market system is non-existent, the benefits of its efficiencies cannot be reaped hence the need for government intervention in the market. The government may choose to intervene in the market so as to change the allocation of resources in the market so as to achieve improvements in social and economic welfare (Spitzer, 2011).

The government should progress and regulate the market`s economy. According to (Spitzer, 2011), competition cannot work efficiently without a well-managed and well-structured marketplace. With this in mind, hence, the government proves as being the only entity that maintains the whole market system in good conditions. Government regulations also provide a stable currency and national security crucial for smooth business activities. In addition to that, the government provides a solid legal foundation where companies provide contracts, patents, and property rights.

Major complexities that can arise when the company expands via a capital project

In the long run, a firm can modify its inputs to alter its output levels. As capital is one of the inputs of business, it can be invested so as to relay further growth and maximize shareholder value. In simple terms, the business can expand via capital projects. A capital project is a plan that requires huge amounts of capital so as to cultivate and construct an asset owned by the business (Spitzer, 2011). Capital projects can include activities such as the construction of new warehouses or the acquisition of new equipment that will increase the company`s efficiency. All businesses ultimately face the task of handling business growth or development. According to Tonkiss (2006), the expansion of a business means that the company has to adjust to a new set of rules in real time in a very unique industry. The pursuit of expanding is plagued by significant complexities that arise during the process. The paper attempts to address them while providing actions that could deal with those problems.

As the company grows via a capital project, the food company will certainly need to acquire infrastructure that can assist managers to track cash flow, inventory, and delivery systems, finances management, human resource information and other aspects of the expanding business operation. At this stage, technology is a crucial component since there are software systems that can assist managers to monitor the expanding business activity (Tomkiss, 2006).

As the food company expands, there will be complex issues regarding hiring new personnel to the demands that are associated with new production requirements, new recordkeeping, new marketing campaigns, and administrative requirements of the now larger company (Tonkiss, 2006). At this stage, careful hiring practices will be essential since the business will have been engaged in a sensitive period of continuous expansion. In order to, ensure that the company has a team of trained, skilled and experienced professionals the principles of human resource management will be required so as to ensure that the company is not starved of qualified and competent staff.

Exceptional customer service proves to be a crucial factor as the business grows. Since the food company under investigation is in a highly competitive industry with lots of substitute products, customer service proves to be crucial. As the business grows, the customer service that resulted in the growth becomes difficult to sustain as a result of logistics (Spitzer, 2011). In such scenarios, the business might have difficulty retaining the existing clients as it attempts to secure new business. A key to avoiding such challenges is to maintain adequate staff levels so that the customers will receive the attention they ultimately deserve. Remember the client is king always.

The Convergence between the Interests of Managers and Stockholders

The management team acts as the agents that run the day-to-day operations of the business while the shareholders own the company. The two parties are interconnected since the actions of the both of them can go a long way in affecting the other party. Shareholders desire managers to make decisions that will give them the most value for their shares (Gunay, 2008). The chief objective of any company is to maximize the value of the shareholders. The gained value is represented by the market price of the company`s common stock that reflects the company`s financing, investments and dividend decisions (Gunay, 2008).

The maximization of profits is a goal that the firm`s management must strive to achieve. The maximization of shareholder wealth; on the other hand, is not an inclusive management goal. This begs the question of how the interests of the managers and shareholders can be converged in one streamlined form. Under normal circumstances, the managers will seek to maximize their survival and can strive to attain only the acceptable level of growth since they are more concerned with perpetuating their existence for as long as possible. On the other hand, shareholders are interested with the maximization of the value of the firm since they draw their earnings that way. A convergence of interests hence proves to be crucial in order to repel conflict.

One way to ensure the convergence of the company is by incorporating incentive compensation systems (Gunay, 2008). The incentives can include bonuses, higher salaries, performance shares and stock options rewarded to managers as a result of superior performance. Poor performance will also be assessed and penalized accordingly. These management remunerations are tied to performance hence can assist the interests of both parties to converge. In such a case, managers will have a stake in maximizing shareholder welfare.

Conclusion

In today`s competitive world, it is essential that every business continually innovates and updates its strategy of activities if it is to compete effectively. Given the food industry`s immense challenges the business strategy can assist the business to survive. A value-based pricing strategy will enable the company to develop a price that will be reflective of what consumers are willing to pay hence reduce the product`s elasticity.

References

D`Souza, E. (2009). Macroeconomics. New Delhi. Pearson Education India.

Gunay, G. (2008). Corporate Governance Theory: A Comparative Analysis of Stockholder and Stakeholder Governance Models. Mumbai: iUniverse.

Hinterhuber, A. (2008), Customer value-based pricing strategies: Why companiesResist. Journal of Business Strategy, 29(4), 41–50.

Macdivitt, H & Wilkinson, M. (2011). Value-Based Pricing: Drive Sales and Boost Your Bottom Line by Creating, Communicating and Capturing Customer Value. New York: McGraw Hill Professional.

Spitzer, E. (2011). Government`s Place in the Market. Boston: MIT Press.

Tonkiss, F. (2006). Contemporary Economic Sociology: Globalization, Production, Inequality. London: Routledge.

Töytäri et al (2015), Organizational andInstitutional barriers to value-based pricing in industrial relationships, Industrial Marketing Management. London: Routledge.