In business circles, the debate is over now. The agreement is that in the business streets, the bond note is not at par with the US dollar. One United States dollar can cost you around $3.80 bond today. Businesses therefore need to price their goods and products intelligently in order to afford restocking and other expenses that keep them in business. It’s as simple as that. Apart from local competition, cheaper imports from South Africa and China threaten to weaken local companies. These foreign companies enjoy greater economies of scale and can afford to sell cheap. We do not have such privileges. As such, we have to be clever. In this article, we explore how businesses can price their goods and services to achieve maximum return on investment in the prevailing economic environment.
Base your prices in foreign currency
One clever way, and perhaps the most popular among business people, is to maintain your base prices in foreign currency at all times also known as Real Value Accounting (RVA). What this means is that, after taking into consideration your cost of raw materials, what the market is willing to pay and what your competition is charging, you come up with the price of your product. This price must be in US dollars or Rands, whichever currency you use for most of your raw materials or orders. For tax purposes, you can then have a bond price which is in line with the exchange rate at that time. So, if any customer comes to buy in bond notes, you sell to them on the current exchange rate which is in effect that day. This works well for smaller companies where you sell fewer items. For larger retailers, this may prove difficult as you need to change your price tags almost daily. But, it still has to be done in order to survive. In most sectors, your competitors’ prices will determine what you charge for your products. The current environment is one in which disposable income is limited so the customer would want to buy the cheapest product on the market. Do not overprice. Take note of this.
In a country where cheaper imports tend to flood the market, start up businesses can turn to textbook pricing strategies like penetration pricing. Under this strategy, you can attract customers by offering lower prices when you enter the market. With time, and when you have gathered a considerable market share, you can then increase your prices. A new barbershop in the area can start cheap and then when they have loyal customers they then increase their prices. Initially, you may find that your profit margins are not much but when you increase your prices you will smile all the way to the bank. The trick here is to ensure that your production costs are covered and you are still making some profits even at penetration prices.
Another strategy that businesses can use in Zimbabwe is psychology pricing. Marketers use psychology pricing to encourage customers to respond on emotional levels rather than logical grounds. As an example, you can sell a bag at $199 instead of $200. Even though the difference is negligible, this technique has proven to be attractive to more customers. Consumers tend to pay attention to the first digit on the price tag. In Zimbabwe, the $1 for two trend is popular. In reality, items will cost 50 cents each, but if you say $1 for two, it sounds like the dollar is buying more than it should and encourages the customer to buy two.
You may also consider bundle pricing. This is when you sell multiple products for a lower rate than what consumers would have paid if they bought one item. For those businesses selling items in bulk, this strategy works well. As a clothing seller, you can say 10 shirts cost $9 but one shirt costs $1 each. This means those buying ten items at once get to save $1. Your bundle price should be enough to cover the discount given, once again.
Depending on your industry, economy pricing may also be worthwhile. If you are operating in an industry where your market is price sensitive, you can use this approach. Economy pricing means that you minimise production and marketing costs in order to keep your prices down. This works well for large retailers but can be dangerous for small businesses. Small businesses lack the required sales volumes to generate meaningful profits when their prices are too low. Also, one needs to make sure their lower production costs do not result in reduced quality of goods. Otherwise you will lose the very same customers you are attempting to entice.
While grappling with how much to charge for your goods and services, you must take into account what the profit margins in your industry or line of business are. Generally, the margins in the manufacturing industry are 45-80%. For retail, between 15-35% profit margins are acceptable. On the other hand, in the clothing sector, 100% profits are normal. A look at these guidelines will assist you come up with a fair price for your product. The most important consideration should be the demand for your product. The more your customers want your product, the more you can charge them for it. Also, in the current environment, when selling on credit , you must factor in possible currency fluctuations that may happen between now and when the customer pays you. This takes us back to the fact that your base price should be in foreign currency and you convert it when the customer is ready to pay.
Zimbabwe today needs tactically shrewd business people. The environment changes regularly. Every morning before you open your shop, you need to check on any currency exchange rate movements because these may have a bearing your prices. For now, we are all economists and should be able to protect our investment by pricing our goods correctly.