Dear Akin attended the Businessday Award Ceremony for top 100 SMEs recently. You said businesses can make money despite the recession and encouraged business leaders to explore selling same product at different prices to different customers, as a way to maximise profit. I run 2 clinics in Abuja; how can I do that?
Dr K
Dear Dr K,
Selling the same product at different prices to different customers is called “Price Discrimination”; a profit maximisation strategy. A few conditions need to be met for this to happen effectively & without negative consequences. Chief of which is the ability to separate the customers to avoid ‘crisscrossing’, and to eliminate the perception that you are unfair.
Price discrimination is ubiquitous and can be applied to most industries. Electricity providers do it (higher tariffs for more affluent areas). Airlines & hotels engage in it (buy early, buy cheaper). Universities (via financial aid), movie theatres (student discounts), I could go on.
For your specific case, here are 3 ways I think you can approach this. You can mix & match:
1. Discrimination by Location: A leading Suya business in Lagos has different prices at her 3 locations – Glover Court Ikoyi, Dolphin Estate Victoria Island and Ikota Complex Lekki. Suya and Yaji, exactly the same. It is unlikely that a customer will drive from Ikoyi to Ikota to enjoy up to 25% discount on Suya. Think about that.
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2. Discrimination by funnel: Some patients are walk-ins (and pay immediately), while others may use Health Maintenance Organisations (HMOs) or other medical insurance providers (and may not discuss price). Some may be referrals, and you need to share revenue with another clinic. This is also an opportunity.
3. Commitment pricing: You may set up ‘Family Doctor’ arrangement or retainership agreements with organisations (a loyalty scheme). You may offer reduced rates as that improves business stability
Let me know how it goes. Best wishes/akin
Dear Akin,
I have a big problem with your advice to businesses to delay payment to vendors. My invoices are delayed up to 6 – 8 months. That advice works for the company receiving service but certainly not for the company providing the service.
Mr F
Dear Mr. F,
Your late payment Nate.
For clarity, my advice is, “accelerate cash in and delay payments for as long as contractually possible”. The key word is “contractually possible”. Payment exceeding the contract terms is wrong.
The fact that this is unfortuis abused does not mean it is not a sound advice. Multinationals need to watch their cashflows, so do sole proprietors.
When Dell Technologies, in response to Apple and Compaq, reviewed her strategy by carrying inventory, they became more profitable. Despite that, they were heading towards bankruptcy as their cash was now tied down, mainly, in inventory. The Founder, Michael Dell, acted quickly by accelerating cash-in and decelerating cash-outs. His words, “… we were always focused on our profits. Cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer (profits), when in fact we were running out of gas (cash).”
Protect your business from those that take advantage of this cashflow advice by discussing and inserting “a late payment penalty clause” in the contract. Since you are indirectly financing their business, you may use prevailing cost of funds as the penalty rate. My experience is that, no matter how low the rate is, customers usually will avoid it by paying on time; it is difficult for a CFO to explain that penalties were paid while trying to manage cashflow.
The advice is sound. Protect yourself from those that stretch it.
I hope it helps? And I hope your inflow improves. Best/akin
Look out for my next article, An Enterprise Starting the Year Strong, on the 14th January 2021
About the Author:
Akin Monehin is a thought leader, speaker, and business strategist. A 2015 recipient of Choiseul Institut France’s Award of Top 100 African Business Leaders under 40 Years old, he hosts the thought leadership conversation on Youtube, “Make or Mar Moments with Monehin”. He is privileged to have worked in over 10 countries including French and Arabic speaking ones and in leading organisations like British Airways, Virgin Atlantic & Nigeria LNG Ltd. He currently works for an International Oil Company (IOC).
Akin can be reached on akin. [email protected] Views expressed in this article are personal and do not represent the views of any institution .
