How your pricing model can make or mar your company

A major determinant for the amount of revenue accrued by any organization, beyond the quality of service or degree of promotion tied to that product, is the price.

This key element largely decides how much profit is generated at the end of each financial cycle, condition’s the value management will subsequently place on their employees through the provision of benefits and welfare packages and either builds brand loyalty or alienates your target customer over time.

While many small and medium scale enterprises make ambitious projections with steep pricing structures that eventually impede fiscal growth, high impact corporate establishments with large asset bases understand the necessity of marrying the cost of production with marginal purchasing rates so as to meet the consumers needs while making comfortable returns on investments.

The importance of pricing for lasting viability was demonstrated in a 1992 Mckinsey & Company survey where its strategic impact on 2,400 companies was reviewed. From the feedback received, it was concluded that more than 50 percent of companies in emerging markets like Nigeria crumble in the first five years of their existence due to a poor understanding of their consumer’s financial capacities and the organisation’s ability to sync the cost of their products to meet their needs.

According to Oliver Mackerd, the retail sector leader at Enrst & Young, “Your Company’s image is largely dependent on the cost of your goods and services.

“If you are creating a product for the mass market and a proper retail analysis of how that amount you have placed on the item can be designed to be accessible by everyone regardless of their level of income is not done, then people will generally think that company unserious if it is too low and snooty if it’s too high,” he concluded.

Invariably, what this means is that clever marketers and business owners try to frame the cost of their products to signal the best value possible.

Corroborating the point of view of analysts at Enrst & Young, the winner of the Africa Banker of the Year Award and Chief Executive Officer of the Africa Finance Corporation, Andrew Alli gives clear examples of how poor tariff or pricing systems has negatively affected infrastructural development in the country.

He expressed, “One of the issues that we see with infrastructure in this country is that a lot of the assets that are used by its citizens are underpriced. An instance is found in the power sector where before the reforms started, the tariff that was charged was way too low and this was one of the main reasons why there were power shortages for a long time.

“In contrast, when the famous telecommunications companies came to Nigeria, it used to cost about N50 per minute. This could only happen because it was a near monopolistic situation. Those rates which were very high enabled those companies to generate cash flow and invest but with increased competition, [the prices] came down and things normalized.

“These different scenarios shows you how pricing models can affect your company especially with competition and the markets disposable income in consideration,” he concluded.

Although the factors that determine how price should be fixed vary for most business models – as a company might be the sole manufacturer of a particular item (for example, St.Louis sugar of the 90’s) in which case they can peg theirs at any amount they choose or, another company might belong to a regulated sector (like oil and gas) in which case everybody has no choice but to comply – there are still some variables to consider when establishing a purchasing value for a brand.

For most main stream business people who operate on a level playing field with stiff rivalries, these are a few tricks to the trade in ensuring that your products fly off the shelf.

According to marketing professionals, figuring out the average monthly income level of the market segment you want to reach out to is vital as this will help you keep the product or service within their reach.

Pricing a tad lower than your competition and making it obvious to your customer that this target disparity exists is also important as it appeals to their sense of comfort and trust – they will think you care about their safety of their pockets.

Other things to keep in mind are the sum revenue you want to generate at the end of each cycle and the future projections of the entire industry as changes in your sector will directly affect the growth of your business.

Rita Ohai