H ow much should I price my product? This is an age old question that probably every one( not only entrepreneurs) has had to ask themselves at one point or another. Since, this question has beset humanity from the time they first began to trade, there are countless books and articles that have been written to help us in our attempt to get to the right price – to which this article is unlikely to add any new knowledge, except to suggest that perhaps the price of a product is more of an indicator of the state of the seller than the price tag we see.
Regardless of how much literature has been dedicated to this subject, pricing remains one of the trickiest decisions that every entrepreneur will have to grapple with and many a businesses have failed due to incorrect pricing.
The fundamental principle taught in business courses and books is that your price should be determined by calculating all your cost to produce a product or service plus a mark-up percentage. While this may be a good start, it does not go very far in helping the entrepreneur to price properly.
The price of a product reveals a lot about the business, especially in the case of small businesses. Based on only the price of the business, one can usually tell a number of things, i. e.
( i) whether this business values me as a customer;
( ii) whether this business is just interested in a once off sale or it wants to attract me back;
( iii) has there been any additional effort into the product or is it just standard;
( iv) in some cases one can even get a sense of how the entrepreneur values him / herself and what they believe about their product and the sustainability of their business.
Clearly based on some of these inferences drawn from just the price of the product, the determination of the price cannot be reduced to a Rands and cents issue, but one that encapsules the very heart of the business.
While this may be so obvious to mature businesses, most small businesses turn to compete only on price. Perhaps the default strategy of only competing on Rands and cents reveals an even bigger challenge, that a significant number of small businesses are being birthed by survivalist entrepreneurs who just hope their business can make just enough to put bread on the table for one more day. So for survivalist entrepreneurs, the price of the product is less of a reflection of the value of the product but more a representation of the space the entrepreneur finds him / herself and the desperation thereof.
So while many small businesses have survived on the bread line by undercutting the guy at the next corner, the landscape going forward indicates that this pricing strategy will not suffice. Further pressure is being exerted by recent trends of big businesses also pressing in to fight for market share that had been previously serviced by small businesses – this has been evidenced by more and more shopping malls mushrooming in every suburb and township.
So instead of using the local butcher, pharmacy, spaza shop, etc. where the customers knew and had a relationship with the owner, more and more, we are seeing such businesses being replaced by big retail chain stores, thereby pushing survivalist small businesses further out of the game.
September 2016
PRICING – an age old mystery
With this changing or changed landscape, small businesses will have to distinguish themselves in order to stand a chance to survive. Because of the low scale, small businesses are better positioned to differentiate their service offering and therefor price differently. The only hope of these businesses is to reposition themselves and believe that their product can add value for their customers.
In order to reposition themselves, pricing will have to be one of the key levers that small businesses use to communicate to the customer. The price has to tell the customer that
( i) I value you as a customer;( ii) I would like you to come back;
( iii) I have put effort in my product and in how it is present it to you and more importantly
( iv) as an entrepreneur I value myself and I want my business to be here in years to come.
While pricing may probably be at the tail end of re-engineering a business, defining your price range will help you in making most decisions you need to make about the business model, the market you play in, the products you buy, etc. This reverse engineering approach may not be perfect, but it will definitely set your mind in the right place as to whether as a small business, you are merely in it to survive or whether you will thrive. In my view, the notion of making sure you get to the right price( as critical as this process is) is less important than the decision of what you want your price to say about your business.
Ngoako Huma CA( SA)