PRICE DECISION DETERMINANTS IN ENTERPRISES ON THE BASIS OF WARMIA AND MAZURY PROVINCE

Piotr Bórawski
Department of Agribusiness and Environmental Economics, Warmia and Mazury University in Olsztyn, Poland

ABSTRACT

The aim of the paper was to present price determinants in enterprises in Warmia and Mazury province. There were also presented main products prices in relation to competitors prices. The survey enabled to answer the question who and which sections of the enterprises take up price decisions. Moreover, in the paper author presented demand situation on main product market. In addition, expected changes in products and prices were presented.

Key words: price decisions determinants, enterprises, demand situation, price deciders, products price, products estimation, price changes estimation.

INTRODUCTION

Enterprises have very important problems with taking price decisions. They are very complicated and they have nothing in common with simple price models. In Schnaars’s opinion [8], when companies prepare to price decisions they should consider situation from all possible aspects. Such approach enables to take up a proper price decision. Other companies functions, such as: accountancy, controlling, finances, advertisement and sale are also engaged in price decisions. Their force of influence on price decision is very high. A complex character of price decisions is also mentioned by Simon [9]. The author singles out two kinds of price decisions. The first group is represented by traits connected with customers, such as: demanding, purchases and price sensitivity. In the second group may be included product placement in comparison to competitors, costs and other factors.

The problem of price determinants takes a very important place in marketing and price literature. The study of Podstawka [7] is worth attention, in witch author shows such price determinants as: demand, costs, structure and behaviour of competition and prices regulations. But, Simon [9] says, that price decisions in companies are determined by three fundamental factors:

• external surrounding, which is represented by potential clients behaviour and competition and country interference,

• internal factors such as: costs, financial potential or productivity,

• the aim of the company.

All companies establish price for their products and services. Price issue in marketing theory is a crucial problem. Prices are the effects of costs calculation and profitability. Price from the marketing point of view, shows actual demand force, informing producers about it. Together they show the real possibility of covering needs with at definite height of supply and incomes. Price is an information about market value of products. The price has an informative function for company giving answer to the question how high will be income. Together individual and wholesale purchasers see price as quality [12]. Many authors give the example of products which sale decreased because of low price. Gabor [2] gives the example of oil with particular characteristics, which was selling very bad because of low price, but when was offered next time with high prices it was selling very well.

The price takes a similar role in comparison to other elements of marketing mix. This similarity is the effect of common market connection and indemnification of market signals. Price with other marketing tools serve to overcome problems, which are faced by companies in relations with purchasers and competitors. Between price and other marketing instruments there is relationship [3]. It is impossible to satisfy customer needs and overcome competitors using only a product, distribution and promotion without prices. The process of taking price decisions should be accompanied by the awareness that their level can be substituted by other marketing instruments. Higher prices are accompanied by additional advantages and services. Lower prices are accompanied by lower advertisement expenditure and price promotion. These and other kinds of relationships cause that price decisions cannot be taken without other marketing tools.

Also, supply and demand cannot appear without price. Sale and purchase processes are expressed by two forces demand and supply which act together. Finally, price on the market is the effect of demand and supply reaction.

While taking price decisions, the managers should take into account two kinds of barriers. The first is a cost barrier, which prevents from prices reductions because of deficiency. The second one is a demand barrier, which prevents from prices rise because of loosing clients and sale decreasing. In Dolinska’s opinion [1] there is an admissible price, which enables companies to achieve maximal profit.

Product price influence its sale. Each product is characterized by price sensitivity. In practice operates a rule, that the high price cause the low sale and otherwise. When the sale of product is sensitive to price it is said that the demand is elastic. When the sale is not changing very much with price change, the demand is not elastic. This is very important information, which should be known by entrepreneurs. Improper prices establishment causes lose of income and demand’s decrease. That is why market research should give the information about optimal level of price [4].

AIM AND METHODOLOGY

The main aim of research was to define price determinants in enterprises of Warmia and Mazury province. The survey was conducted in the second half of 2004. One hundred enterprises were questioned. There was used a drawing choice based on a level choice. The REGON system was the base of running survey. In July 2004 there were 109 939 enterprises in Warmia and Mazury province, but 26 776 were state firms and 83 163 were run by private owners. The organizational form of enterprises was the base of division levels. There were separated following enterprises:

• 62 private enterprises,

• 15 limited liability companies,

• 5 civil companies,

• 4 state companies,

• 3 co-operative society,

• 2 joint-stock companies.

The object of the survey were external and internal price determinants, people and sections taking price decisions and the level of differentiation of main products in relation to competitors.

There were distinguished 17 price determinants. For the need of this study price determinants were divided to two groups: external and internal, which was based on Karasiewicz and Wykrytowicz study [6]. The authors accepted to the main external determinants: unit cost, sale in comparison to previous time, aims of company, product quality, stock level, substitutional relations, and complementary relations with other firm products, planned unit profit and marketing costs. But the exterior determinants, according to the authors, were: competitor prices, product’s value, final purchaser’s sensitivity on price level, position of mediators, the rank of mark knowledge, and margin of agent profit, state barriers and taxes.

RESULTS

The most important factors which had an influence on price decisions in surveyed enterprises were product quality and costs. Worth attention is the fact that sale, planned unit profit and enterprises aim play important role. Very similar results were achieved by Karasiewicz and Wykrytowicz [6], even though the authors questioned only enterprises from mazowieckie province.

After establishing primary price of individual product the next element connected with final price establishing in Karasiewicz [5] opinion, is to regard demand relations between product and other goods and services. Verifications of these relations enable to decrease or increase price. The survey proved that substitutional and complementary relations were not too important determinants in opinion of enterprise owners.

Value of product, sensitivity of final purchasers on price level and competitor prices were important, external factors. One of the essential segmentation criteria is the sensitivity of customers on prices. If on definite markets can be found different price segments, more sensible is to use differentiation activity conception, rather than non differentiation activity conception. In this way it is used other elastic prize conditions in particular segments, and thank to offering different versions of products with different prices, the higher profit is achieved. Purchasers in their purchase decisions pay different attention to price in relation to kind of an article. It is true, that when the group achieve lower income, there is higher sensitivity to prices and every their change. The price changes have influence on demand as they increase or decrease purchases [11]. The author’s research show, that sensitivity of final purchasers was a very important factor.

Marketing behaviour and competitor prices are stated by actual and potential competitiveness’ intensity on product market. The survey proved that competitors’ prices were very important price determinants.

In most European countries there are formal price regulations, which give state institutions high price powers in price domain or to counteract too high prices. Although, the fastest and the most spectacular development was achieved by these countries, which limited their price politics. Price state limits were not too important price determinants in surveyed firms. The survey proved that entrepreneurs were not afraid of price limits, but they paid attention to taxes, which are encumbrances of private activity.

In surveyed enterprises price decisions competences were placed very high in organizational structure. This fact is the result of a small size of a firm, and the price decisions are generally taken by their owners (74%). It was ascertained that 54% of enterprises achieved yearly value of turnover to 500 000 PLN and 66% employed less than 10 employees.

The chairman and the director took price decisions in 22% of surveyed companies (fig. 1). Directors are paying attention to have the last word in price establishing. Finally, price decisions competences are placed very high in management. It is clear because price decisions have an influence on profit, and the need to include external and internal conditioning requires wide and perspective view.

Only in a few cases of price decisions were committed to low level workers. In many companies last price competences decision is not regulated.

Price decisions are one of the most essential elements in company management process in market economy. They enable to built competitive positions of firm on product market, and have direct impact on company financial conditions. All departments of a company should cooperate in taking up price decisions. It enables to include not only market aspects, but also internal aspects. In more than second firm (51%) in taking price decisions was not engaged any organizational section. But in next position there were sale sections (36%) and marketing sections (10%). The survey proved that sale experts cooperate with marketing experts. It gives price deciders safe knowledge about market and makes them closer to markets.

Relatively a few respondents pointed out financial, accountancy and price sections (fig. 2). Small amount of these sections in surveyed firms shows that such branches are in big companies with wide assortment, and there is a big need for price decisions. This results correspondent with Karasiewicz and Wykrytowicz (2003) results [6].

Furthermore, price offer of surveyed enterprises was compared with competitors’ prices. It was ascertained, that in most cases (62%) enterprises offered products with prices similar to competitors. Such behaviour guarantees stable shares in particular market deliveries, because the quantity of sale is adjusted to price changes. Similar results were achieved by Taranko (2004). Price on competitors’ level was pointed out by most companies (38%) [10].

But, it is visibly seen, that a group of enterprises offers products with lower prices than competitors (23%). Such enterprises are the leaders of price change on particular product’s market, and most companies adjust their prices to the proposals. This tendency proves that surveyed enterprises see the possibility to offer products with more profitable prices than competitors. In the possibility to choose between alternative price offers, the price decides whether the customers will buy product. But the tenderness of low price has only the success, when they provide quality estimated by customers as at least satisfactory. There are not such clients, who will buy product, because it is cheap. It is always compared the utility to price. (fig. 3).

Only 9% of surveyed companies offered products with higher prices to competitors. Owners of these companies pay a big attention to quality of products.

In the paper demand situation on main market serviced by companies from Warmia and Mazury province was analyzed. The price depends mostly on market situation and clients’ strength. The survey prove that Warmia and Mazury market is not saturated because 49% of respondents pointed out a positive level of increase, but 28% no change (fig. 4).

Negative speed of market increase was pointed out by 11% of respondents. This situation is the results of demand reduction for firm’s products, and the increase of competitors’ pressure on market. Moreover, the survey proved small differentiation in offering goods in comparison to competitors. Besides, the survey displays a small diversity of offered products in relation to competitive firms.

In the paper the point of price calculation of the most important product was analyzed. As the survey confirms that entrepreneurs pay attention to prices for final purchaser (fig. 5). The offer adjustment to financial possibilities of customers is the main point of consideration for surveyed enterprises (55%). In next position worth attention was unit costs (29%) and unit profit (28%).

Quality and demand are connected with price. That is why entrepreneurs were asked to estimate their product and the directions of expected changes. As the survey proves, the main source of competitive superiority is the high quality of products (75%). No enterpriser estimated the quality of his product as low. The positive fact is that, the price was estimated as average (76%). More than a half of enterprisers (62%) estimated the demand as medium (fig. 6). The survey proves that enterprisers distinguished the meaning of customers’ satisfaction with high quality and accessible price, what prove their knowledge of economy rules.

In the survey, it was interesting to know entrepreneurs opinions concerning expected changes (fig. 7). It is possible to ascertain, that the entrepreneurs were optimistic in future estimation. Every second entrepreneur estimated that in close future he or she would increase income, assortment and markets. It may results in the increase of goods sale, future financial situation improvement, higher goods order, lower increase of goods offered by these enterprises and smaller employment reduction.

The majority of enterprises (83%) estimated that in nearest future prices will be stable. It is possible to forecast, that the market is saturated by goods and services, what prevent price rising. Only 10% of enterprises declared price increase. This result proclaims that the price of production means in enterprises rise in this way enterprises cannot afford to decrease the price.

No entrepreneurs declared assortment decrease. The research proves that regardless of big barriers entrepreneurs will take actions to enhance their competitive position.

CONCLUSIONS

The conducted survey about price decision determinants in Warmia and Mazury province enable to draw following conclusions.

1. Price decisions in Warmia and Mazury province are the effects of many factors, among which quality and unit costs are very important.

2. Enterprises owners and chairmen take mainly price decisions in surveyed firms. It proves that market factors have lower meaning in taking price decisions.

3. The survey proved that in 51% of firms there are no organizational sections, which take price decisions. Marketing sections are becoming more important. That is why, these survey are characteristic only to enterprises acting on Warmia and Mazury province. The survey conducted by Karasiewicz and Wykrytowicz [6] show more sections taking part in price decisions in mazowieckie province.

   REFERENCES

   1. Dolińska M., 1998. Zarzšdzanie marketingowe [Marketing management]. Wyd. Politechniki Lubelskiej, ss.191 [in Polish].

   2. Gabor A., 1975. Pricing i Theory and Practice. In Directing the Marketing Effort Publisher Pan.

   3. Garbarski L., Rutkowski I., Wrzosek., 2001. Marketing, Punkt zwrotny nowoczesnej firmy [Marketing, Turn point of modern enterprise], PWE, Warszawa, ss. 690 [in Polish].

   4. Hague P., Jackson P., 1992. Badania rynku, zrób to sam [Market research, do it on your own]. Wyd. Kogan Page LTD, London, współwydawca Instytut Przemysłowo-Handlowy im. Mirosława Dzielskiego, Fundacja Krakowskiego Towarzystwa Przemysłowego, Kraków, ss. 266 [in Polish].

   5. Karasiewicz G. 1997. Marketingowe strategie cen [Marketing price strategies]. PWE, Warszawa, ss.304 [in Polish].

   6. Karasiewicz G. i Wykrytowicz J. (2003). Decyzje cenowe w przedsiębiorstwach polskich [Price decissions in Polish enterprises], Working Papers nr 03-018, Wydział Zarzšdzania, Uniwersytet Warszawski, Warszawa, s. 4-5 [in Polish].

   7. Podstawka K., 1997. Praktyczny marketing. Kluczowe elementy [Practical marketing. Crucial elements]. Wyd. Promer, Rzeszów, s. 114-119 [in Polish].

   8. Schnaars S. P. 1989. Megamistakes, Forecasting and the Myth of Rapid Technological Change, The Free Press, New Yourk, ss. 159.

   9. Simon H., 1996. Zarzšdzanie cenami [Price management]. Wydawnictwo Naukowe PWN, Warszawa, ss. 641 [in Polish].

   10. Taranko T., 2004. Cele działalnoœci marketingowej polskich przedsiębiorstw [Price marketing aims of Polish enterprises]. Marketing i Rynek 3/2005, PWE, Warszawa, s. 22-29 [in Polish].

   11. Waniowski P., 2003. Strategie cenowe [Price strategies]. PWE, Warszawa, ss.235 [in Polish].

   12. Wilmshurst J., 1987. The fundamentals and practice of marketing. Publisher: Heinemann, London, ss.239.

   The paper is based on the research conducted within the research Project No 3P06 064 25, financed by national Committee for Scientific Research (KBN), Poland

   [2] The survey were based on questionaire, whose authors were Karasiewicz G. and Wykrytowicz J. (2003). Decyzje cenowe w przedsiębiorstwach polskich, Working Papers nr 03-018, Wydział Zarzšdzania, Uniwersytet Warszawski, Warszawa, s. 4-5.

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   Piotr Bórawski
   Department of Agribusiness and Environmental Economics,
   Warmia and Mazury University in Olsztyn, Poland
   Plac Łodzki 2, 10-957 Olsztyn, Poland
   Phone: 48 89 523-33-13
   email: pboraw@moskit.uwm.edu.pl
   

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   Responses to this article, comments are invited and should be submitted within three months of the publication of the article. If accepted for publication, they will be published in the chapter headed 'Discussions' and hyperlinked to the article.

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