How a diminishing value system affects pricing
Some weeks ago, the estimable analytical columnist Mungai Kihanya debunked the assumption that the relationship between higher price points and higher profits is always directly proportional.
The article did not receive as much attention as it merits.
This is mainly because as Kenyans, we have a dysfunctional relationship with value. The construction of our value system in the postcolonial imaginary is based on calculating all forms of value strictly in monetary terms.
While the country is famous for many honest, self-made entrepreneurs, in the measurement of their economic exceptionalism, the varied texture of their stories is often eschewed for the shorthand for their net worth.
Thusly, all the features and qualities of an object are reduced to its sticker price. A tycoon isn’t reported to have bought a Maybach, a luxury marque with more heritage than most, instead he buys a 40 million shilling limo.
The absolute perigee of this embarrassing state of affairs happened in 2004 when both of Kenya’s top dailies explained Prof. Wangari Maathai’s achievement of receiving humanity’s biggest honour in the Nobel Peace Prize by highlighting the cash ward in the sub headline. Look it up.
Perhaps this sad paradigm was codified in our classist colonial past, it makes us confuse an objects’ price from its true worth, the reality is that it is very unhealthy for price modelling in business.
Self Deficiency and the 4000% Mark-Up
Remember when you were young and admired smart business people? Turns out most of what they did is jack the price up. Often, when you buy anything in Nairobi, there’s regrettable feeling of being fleeced a kind of buyers’ remorse. It is pervasive and it leads businesses down a self destructive path.
At this point it is also worth noting that we don’t really prescribe low price strategies but rather we advocate for great value strategies.
Raise your hand if your cousin or colleague has an Instagram boutique selling off-brand Turkish fashion at a price points that would embarrass bespoke establishments along the Via Condotti in Rome!
Some designer suits are so marked up in Nairobi, it is cheaper to fly to Europe and get fitted, have a coffee while at it and fly back. That is not a joke.
That 3 dollar latte you have there, will cost you the same 3 dollars in Nairobi despite having none of the associated freight and labour costs.
There’s a Toyota that retails higher in Nairobi than a Lamborghini does in Europe and in the US where people can actually afford a supercar.
Our energy costs, per unit, regularly flirt with the list of the top ten highest in the world yet we have only a fraction of the purchasing power.
The Eurozone mortgage averages at 2.64% while in Kenya it’s currently at the untenable, barely legal figure of 21%.
A week trip to the Red Sea resort of Sharm el-Sheikh, and in more premium accommodation, is cheaper than a week in Diani. This last example especially, and the design of the Kenyan Tourism product in general is a case-perfect illustration of self-deficiency in pricing policy.
The salient takeaway from Mr Kihanya’s piece is its subversion of the assumption that a seller who unfairly seeks to maximise their profit only does so at the customer’s expense. As proven by the article, many times it is to the detriment of the seller as well.
There are many interesting price modeled products in the market that indicate that price modelling is advancing in Kenya. The proactive pricing model used by Jambojet, though far from perfect, is one of them.
Many products we have encountered would be more profitable if the markup was lowered and the sales were scaled up in volume. After all, Kenya is largely a budget/value market.
Its not just business attitudes that need to change, credit and government systems also affect affordability. When affordability has more to do with payment terms than absolute costs, the design and assumptions around our credit fails potential buyers.
It is important to recognize apex systemic causes as well. Our customs-heavy tax regime puts unwarranted pressure on goods that ends up on on retail stickers. Vehicle importers especially are trapped in a zone where if they cost per unit the price is too high to be affordable while the cost–volume–profit method represents significantly higher risk for those without high demand products.
Recently, stakeholders around the housing industry have come out and said that there is a glut in some market segments. In a housing market with acute levels of housing shortage it is obvious that housing affordability research, or any attempt to measure what the customer is prepared to pay is routinely ignored.
In conclusion, increasing your price might reduce profits and decreasing your price can increase profits. If you answer in the affirmative to any of the following questions you should consider your revisiting your pricing strategy, hopefully downwards.
Have you at any point increased your price by close to 100%?
Do you have a competitor who is cheaper with a higher quality product?
Are your clientele increasingly niche?
Would it be embarrassing if customers found out your unit costs?
Are your cheaper competitors growing faster than you?
Are you wrongly described as a boutique business?
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We can be reached at human[at]utu.co.ke for product design and price modelling services, Thanks.