Pricing challenges are nothing new to entrepreneurs and are typically some of the earliest they may face in the course of establishing a new business. 4 entrepreneurs take us through choosing the right pricing model, as they have noted it can be tricky for business owners and South Afican SMEs alike.
Choosing the right pricing model can be daunting for business owners, according to an article by Business Insider, having to take into consideration a multitude of factors from the cost of production, distribution, labour and the profit margin they are looking for before settling on a particular pricing model for their business.
Profitability and sustainability are the biggest considerations when deciding how to price your products and services, says Mazanai Musara a researcher and the academic coordinator for business science and marketing at Monash South Africa.
“A well thought-out and innovative pricing model can be a key differentiator for your business and this is paramount for the success of your business,” says Musara.
SMEs, if they are to have any chance of success, must get it right, he adds.
With that in mind, SME South Africa approached four business owners to find out how they are navigating the pricing minefield and their strategies for increasing prices without losing customers.
OUR PANEL OF ENTREPRENEURS
Pule Phafane – Founder and director of TechCloud, a mobile application development company.
Roxanne Page – Managing director and co-founder of SassyChic, an online retail store.
Stephen MacLennan – Owner and director of Cherryserve, a company that connects businesses with website developers.
Christi Jackson – Director of operations and co-founder of The Re-Generation, a waste management company specialising in the creation of sustainable employment.
Q: WHAT SORT OF PRICING CHALLENGES ARE YOU FACING RIGHT NOW?
‘Currency and exchange rates’ – In the global market that Techclouds operate (where we develop mobile applications targeting the global population similar to Facebook and Twitter). It is even harder to determine the price of our offering. Factors such as currency and exchange rates play a bigger role between developing and developed countries – Phafane
‘The high cost of logistics’ – Delivery charges and security are the biggest purchasing factors in our industry. The fashion and e-commerce industry is one that is high paced, the turnover of products need to be quick as customers want new products frequently, so the price has to be just right [in order for] items to sell fast, but also to cover our overheads (logistics, storage, staff, photography, marketing, security, software, web maintenance) – Page
‘Know the value of the product’ – My business in particular works in the recycling industry. My biggest challenge is thus finding appropriate prices as we use mostly waste in our creations. We still want to create beautiful items that are deemed to be of value, without undercharging or overcharging at the same time – Jackson
‘Find the sweet spot’ – The biggest challenge is always trying to find a sweet spot where the user of your service feels they’re getting more value than what it costs them. For Cherryserve, the added complexity is that as a marketplace we have two distinct users – MacLennan
Musara on the pricing challenges faced by SMEs: One of the [biggest] challenges entrepreneurs often face is trying to strike a proper balance between profitability, competitive prices and providing the best value for money to their customers. The challenge is even more pronounced if a big business with a similar product is able to reduce their prices enormously, making it difficult for the small business to be competitive.
Q: WHAT FACTORS DO YOU CONSIDER WHEN PRICING YOUR PRODUCT/SERVICES?
‘Watching the big dogs’ –We try to mimic industry leaders and somehow make our prices a little bit less than what they charge. Sometimes we use percentage margin of whatever we are selling. For example, with QBER (one of our mobile apps) we take 15% off whatever our partners are charging – Phafane
‘Always think of the customer’ – It’s a balance of intuition, basic business principles, and math. Sometimes when it comes down to the wire, I will ask myself (a woman and online fashion consumer) – “if I was buying this product at another retailer what would I be prepared to purchase it for? What do I personally think it’s worth and is it fairly priced?” – Page
‘The cost of production’ – We work with a group of women in Diepsloot to create unique up-cycled products. We firstly look at the materials required to make these products and then, more importantly, the labour fee and time involved for each product – Jackson
‘Pricing formulas and structures’ – There are many pricing methods that form the basis for fashion retail – namely keystone pricing, suggested retail pricing from manufacturers, anchor pricing and psychological pricing (pricing something at R399 instead of R400, for example, has been shown to sell better amongst consumers in research) – Page
Musara on important factors to consider: Some aspects that entrepreneurs need to consider when pricing an offering are the production costs, the expected profit margins, the price of similar or substitute products and the stage of the product lifecycle and a pricing strategy that is most appealing to the nature of their product and the target market.
Q: HOW DO YOU IMPLEMENT A PRICING INCREASE?
‘A well thought-out strategy’ – Price increases should be [implemented] at a strategic point of the business and the best way to go about it is to introduce an additional feature that comes at an additional cost to the basic cost. More emphasis in marketing should be [on] the benefit of the new feature and less about the cost attached to it – Phafane
‘New offerings’ – [When] we bring out a new product range or product feature, we are able to introduce a price increase – Jackson
‘It’s a battle for the little guys’ – Pricing increase is only really relevant for our delivery charges and minimum order quantities for free delivery as our products change frequently. Customers do anticipate these increases from time to time as they are often driven by petrol prices and so on. High delivery charges are the number one deterrents for online shoppers abandoning their shopping carts so it can be tricky to balance.
In 2016 customers expect free and fast delivery on top of competitive prices. This is difficult for smaller online businesses such as myself as the larger e-tailers have a lot more resources to make their shipping cheaper and faster. When it comes to price increases from our manufacturers (fabrics, labour costs, etc) that have affected our wholesale buying we have to be circumspect about the products we purchase. As a small business, we have to drive and market our personalised customer service, quality and exclusivity probably more than pricing as larger corporates will beat us with competitive pricing more often than not – Page
‘Consider the operational costs’ – Price changes need to represent changes in operating environment – MacLennan
‘Price additional features separately’ – I usually compute the financial projections to see if the project is on track to reaching a break-even point as expected. However, if there are new features in the pipeline that significantly increase the value-add, I often strategize the best way to couple the feature launch with an additional price to the feature – Phafane
‘Consider economic conditions’ – As living expenses rise, so too does the labour fee. It is very important for us to make sure that the ladies who work with us earn a fair wage – Jackson
‘Openness and honesty’ – Customers thrive on trust. Be honest and transparent with your price changes, and so long as your price and quality balance is still in check customers will understand – MacLennan
Musara on getting a pricing increase right: Giving your customers a compelling reason for a price change is paramount in order to retain and to have a long-term and mutually beneficial relationship with customers. The message must focus mainly on the positives, be transparent and be used to connect and create a strong bond with your customers.