Description of the Pricing Strategies Tools
Pricing strategies are approaches to setting prices for specific goods or services that depend not only on business owners’ intentions but also on external market factors. One of such strategies is price skimming, a practice that deliberately inflates the price of a new product. This principle is characterized by a number of constraints, such as high upfront costs and inelastic demand. However, according to Grundy et al. (1998), price skimming contributes to gaining super-profits that recoup the investments spent on the development, production, and launch of the product in a short time. Another strategy from this group, which also implies planning conventions, is loss leader pricing. This method involves selling goods or services that are offered at a low price, often below cost, to attract new customers. As Mills (1999) argues, surplus sales and brand awareness are significant prospects for this approach. Nevertheless, this strategy carries some risks, such as the inability to refund products sold at low prices, which makes it only reasonable to apply in a sustainable retail environment.
In the financial sector, there are project assessment tools that allow calculating specific accounting parameters and drawing up an objective picture of business success. One of these tools is a payback period, a criterion that reflects the time required to recover the investment spent. This parameter’s value and relevance are high due to an opportunity to obtain rational conclusions about the work done. Johnson et al. (2011) confirm this fact and note that the ease of evaluation makes this assessment practice convenient and accessible. Thus, a payback period is a helpful instrument to apply.
Another tool is the accounting rate of return, a criterion that is similar to a payback period. This parameter reflects how much profits have grown over a certain period compared to the initial investment in percentage terms. This indicator has a high value as a financial and economic and a marker of the work done. As Collier (2012) notes, the accounting rate of return helps calculate the parameters of profit for many individual periods, thereby providing a holistic picture of growth or, conversely, a decline in business performance. Arnold (2012) states that this method can also be “an attempt to solve some of the problems associated with earnings or earnings per share metrics” (p. 640). Therefore, both assessment tools are critical assessment instruments for businesses.
Arnold, G. (2012). Corporate financial management (5th ed.). Pearson Education.
Collier, P. M. (2012). Accounting for managers: Interpreting accounting information for decision making (4th ed.). John Wiley & Sons.
Grundy, T., Johnson, G., & Scholes, K. (1998). Exploring strategic financial management. Prentice Hall.
Johnson, G., Whittington, R., & Scholes, K. (2011). Exploring strategy (9th ed.). Pearson Education.
Mills, R. W. (1999). Fundamentals of managerial accounting and finance (4th ed.). Mars Business Associates.