Pricing strategies suitable for your goals

Thursday March 21 2019



Wambugu Wa Gichohi

Wambugu Wa Gichohi 

Our ongoing exploration of finance systems needed to run your business turns to pricing and stock control.

Pricing is a critical element of your finance system-you might be selling but not at the right price. There are about six pricing strategies available depending on what you want to achieve. Price skimming is appropriate when your products enjoy little or no competition. You set prices high to “enjoy it when it lasts” then reduce when competition comes in.

In premium pricing you build value perception in customers’ eyes by proving your product is unique and much valuable than competition-from store layout and decor, packaging all through to marketing campaigns.

It is most appropriate for unique, rather than mass-market products. Eg, in Dar es Salaam, you pay Sh15,000.00 (premium) for a haircut in Oysterbay while the same costs Sh2,500.00 in Sinza.

Penetration pricing is used to attract customers, with low prices, where there is competition.

You will initially not cover all your costs but over time, when customers are convinced by your offering, they come in droves and drive your volumes and profits, thereby covering past losses.

It cannot be sustained for too long as we have seen with telcos, where a new entrant sets prices below the dominant player-if the price is too low to cover operational costs over the long run alternatives have to be sought-some have had to sell out or merge to remain relevant.

Telcos put together airtime to call their network, other networks, SMS and data all in one bundle selling at less than what you can get for each separately. This is bundle pricing.

What they don’t tell us is that they include SMS because it doesn’t sell by itself after the advent of data-based chatting apps.

Eventually, our perception about the bundles grows because they give us freebies, never mind that you may never use them. This pricing strategy can also move big volumes for small businesses.

We often see price tags reading Shs. 99,999.00 rather than Shs. 100,000.00.

This is psychological pricing targeting your emotions rather than your logic-and it works! You buy because, like many other consumers, research shows that you attach more importance to the first number on a price tag, not the last.

Economy pricing is used to attract the price-conscious customer-in return you must keep costs low to be able to offer economy prices.

In essence it dictates low margins. It is more appropriate for bigger players who drive large volumes that can generate profits even at low margins. For large-scale retail businesses such as supermarkets, fuel etc this might be appropriate, not for small low-volume businesses.

Combinations of these strategies can be used depending on target markets and prevailing market conditions.

Using ERPs ensures pricing details are adjusted throughout the financial system once initiated. Fair competition laws restrict franchisors from dictating franchisee pricing, they can only recommend.

Stock control is the other key element of the finance system. You need a system that manages how you buy stocks, manages shipping, receiving, tracking particular stock items and storage.

You also need to know stock turnover and re-order levels for each item you sell. It is important so that you avoid carrying dead stock and you know whenever pilferage occurs.

It is rumored that one of the main reasons for closure of a large South African supermarket chain in Dar es Salaam and eventual pullout from Tanzania was unabated stock pilferage where staff sold items at “Sale” prices even after they had long been pulled off the “Sale” list.

The writer is the Lead Franchise Consultant at Africa Franchising Accelerator Project that helps indigenous African brands to franchise, turns around struggling indigenous franchise brands to franchise cross-border, settles international franchise brands into Africa to build a well-balanced franchise sector and creates a franchise-friendly business environment with African governments for quicker African integration.

wambugu.wagichohi@worldaheadafrica.com, franchising@tpsftz.org

Advertisement