It’s easy to save yourself from a lot of work by copying the prices that your competitors have set. It’s also lazy. Their pricing is only supposed to be a benchmark for what you should charge your customers.
It’s normal in Kenya to read stories of entrepreneurs, probably younger than you, say they make millions in a bad month (ugh…). The veracity of those claims are not our business. But it can leave you inspired, frustrated and shamed all at the same time. If you’re in the same line of business, you may even opt to copy everything that they do including pricing.
Blindly, setting your prices the way others do is not good practice. I’m 99% sure you and others have the same long term financial goal of becoming rich. Your financial goals for today, tomorrow and the near future may not be the same though. Also, who is to say their business model is successful at those prices? I’m sure other people wrote to you stories along the lines of “Nakumatt and brand power.” Yet, the moves they were making was based on some myth.
You can’t do everything right and get pricing wrong. Prices are what all your businesses is angling at (okay, it’s sales but you get the point). It reflects the good or bad work that you’re doing. This importance we see in the way it affects what kind of customers you have, how much working capital you have and the profits you hopefully make.
If you’re satisfied with all your business metrics, you obviously don’t need to correct your prices. Come back for another article tomorrow, friend. Fixing poor pricing involves dealing with some key factors that influence profit. You have to do it in the right mix to get the most out of your work. This is because these factors have different levels of impact on sorting out your pricing. Increase what need to increase. Reduce what you don’t.
Reducing fixed costs usually requires that you make big changes to the way you work. They have little relation to how much your business produces. For instance, it doesn’t matter whether you made a profit or not – your employees will expect their pay, the landlord will expect his rent, and so on. On our list, reduction of fixed costs has the least effect on how your price will affect the profit. If you were selling 10 products at sh.100 each and your variable cost was around sh.40. In this awfully simplistic example, if you reduce fixed cost by, say, 10% and keep the same price your profit would only increase as much.
This is the go-to measure for small businesses in Kenya to increase profits at the same price. Problem, is that it usually comes with increased variable costs (more orders = more payments to your delivery guy) and other discretionary spending like marketing. These eat into your profit and offset your hard work. Even if it’s “demand season” your variable costs will go with selling more. Alternatively, other entrepreneurs believe in reducing prices so that they will “naturally” sell more. Are you confident that the number of customers will increase enough to offset the reduced money you make on a single product? Lowering prices is almost always regrettable – unless you’re solving other problems like too much stock.
Variable costs change proportionately to increased production. They include the costs of getting your supplies and other necessary costs that go into the sale, like commissions. It’s why small businesses in Kenya suffer. Even City Authorities increase their bullying by how active your business day was. The good news is that these costs are much easier to reduce than fixed costs. Your negotiating skills come in handy to do it without reducing production or compromising on your level of quality. You must also make the decision whether to drop products that make little to no profit so that their variable costs die with them.
In several films or movies, one of the characters usually goes on to use the title of the movie in a line as if to remind us (ugh…). In the same way, price becomes the most important factor in fixing price. Increasing price will bring you the biggest gain if all other factors remain the same. But you must consider that “naturally” people will buy less if you increase price. Therefore, your new higher price should compensate for the drop in the number of customers. That is not easy. It deserves an entire article, don’t you think?
In your business, you’re not going to get the luxury of dealing with the factors above in isolation. But we have covered some of the domino effects that come with. Your best bet will be to make changes in more than one factor. That’s the struggle.0