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 )