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Pricing Decisions and Stock Value (Part 1)

7 February 2008 - Miscellaneous - Editor

Nothing in the directly controllable domain of a professional manager can match pricing discretion, when it comes to immediate and dramatic effects on stock price. Operating margins will show effects within the quarter following a pricing decision, especially when management accounts segregate revenue trends due to volume changes from those because of unit price changes.

Pricing decisions are lonely and public at the same time. The net effects on stock value may be difficult for minority stock investors to discern, but employees and supply chain tiers are mostly aware of this phenomenon. Labels, lists, and flyers are where manufacturers and service providers make formal commitments about their discretionary prices, and any change decision is exceedingly difficult for a professional manager. This is because the benefits and risks are equally nebulous, and you can never be sure of the final outcome.

However, the gross margin under which a stock operates can fluctuate wildly because of deals, promotions, and informal changes in terms of supply. Such profit erosion can occur even without management knowledge, to say nothing of prior consent of stock holders!

Indiscipline in a sales organization is primarily responsible for unplanned changes in effective prices. That is why the hall mark of a stock that performs consistently, is the establishment of strict procedures on formal and informal changes in effective prices. Consider for example how much easier it is to get an airline ticket at a special price, or an upgrade, than it is to negotiate the purchase terms of fast moving consumer goods.

How Demand Elasticity Errors Can Destroy Stock Value

Pricing decisions have simultaneous transparent and opaque effects on stock value. Investors believe that clarity exists when prices are administered, if costs are broadly known, and if competitors act in concert (within national anti-trust laws). Public utilities and generic products as well as services, are common examples of transparent effects on stocks when prices change in any form. It follows that we have a reverse situation when manufacturers and service providers bid at auctions or for tenders: it is nearly impossible to detect inflationary trends or signs of deflation in such management situations. A striking example if that of the major European manufacturer of civilian aircraft: its margins have slid behind its famed US rival in recent times.

Pricing Decisions and Stock Value (Part 2)


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