13th November, 2020
By Julius Masaba
Uganda has a dual economy. Meaning it has both government and private participation in decision making, resource allocation, production, etc.
It’s mostly seen as a liberal economy. Ugandan businesses operate in a free market environment, meaning (and most evidently) that some one can start a business and charge a price he or she wants, apart from a few sectors that have some government regulation like utilities — notably power, water, insurance, air transport etc. where it does that through authorities or agencies.
The advantage with a free market is that you charge what you want. The buyers also benefit by having an opportunity to haggle or pay less by having alternatives. The disadvantage is that sellers get to miss some customers when they come across an affordable option. The buyers face it rough in such a market — they ignorantly get cheated (very high price or poor quality product or service).
In this article, I want to give a few tips on pricing your products or services, as a person or as an entity or business.
Pricing your product
Pricing your products, and here I mean tangible products, can be a challenge to most businesses. Most times they close due to poor pricing. Usually many of them price their products cheaply or low in a bid to look affordable compared to competition in the same industry or as a market entry strategy.
It works (for some) in the short run but may backfire in the long run. This is because of changes in the business environment. When a business sets a low price, most times it wants to set itself apart and be perceived in the industry by its low prices that would be attractive to their customers yet they in actual sense have a lot of operational expenses to meet such as power bills, payroll, rent, etc.
That’s why pricing is a very confusing dilemma, a two-edged sword. While you do not want to charge less for your product, you also don’t want to over price your item out of the market. Why a customer should buy from your outlet and not the other is just a debate about value.
There are different product pricing strategies that can be applied, like;
i) Cost-based or cost plus pricing
ii) Market pricing
iii) Pricing by skimming
iv) Premium pricing
v) Bundled pricing
vi) Psychological pricing
vii) Anchor pricing
For this article, I will focus mainly on cost-based or cost-plus pricing.
This technique is used to attach a price to your product, basing on mostly factory factors. To set your first price, you get the sum of all the costs involved or to be involved in availing your product to the market. Such costs are raw materials/inputs, labour, transport, electricity, etc. — mostly direct costs first.
You then get your desired or calculated profit margin and add it on top of those expenses and the resultant is the price for your product. Most factory made products use this technique. If it looks very easy as ABC, then you are half right. However, note that pricing is not a decision you wake up and only get to make once.
How about retailers; like grocery shops, how do they price their items?
Retailers get the product at factory or wholesale price and compute their operational or overhead costs and then determine when to break-even basing on the price they are buying at and quantity or volume of the products.
They rarely go beyond a certain retail price unless it’s an industry like hospitality, etc. and basing on location, movement or speed of business, etc. That’s why retailers stock a lot of items, with very small profit margins but moving or selling very fast, hence fast moving consumer goods (FMCGs).
At times they are on pressure to sell as many units of different products from different producers so as to meet rent costs, labour, etc. Such products include soda, sugar, tea leaves, soap, etc — mostly home consumables.
When you are a new product in the market which is already flooded with alternatives from other producers or suppliers, the price you set might attract competition. Your rivals might beat you at the game if they decide to lower the price further than you and yet your profit margins determine the level of profit you will make.
Retailers have to play around overheads and volumes to break-even. Producers ought to play around their input costs, profit margins and volumes. I know of some chain pharmacies around Kampala that have ‘lost gas’ due to poor pricing and several retail supermarkets have closed due to the same.
Pricing your services
A service is an intangible offering to the market. Much as the service sector can also have ‘products’ e.g. financial products, pricing of these products or rather services is a little different from that of a tangible product. When you offer a service, you bill.
When you are playing in an intangible industry, it can be difficult to figure out what to charge for your services. Most services are delivered to the client personally. I mean, you have to see or come in contact or face to face with the performer of the service.
Meaning exchange of skills, knowledge, expertise for your money. Such can be training, education, transport, medical care, hospitality, tourism/leisure, consulting, name it. So, how do you make sure that your skills/knowledge/expertise are not undervalued while still being able to compete with other prices?
Since your clients are not purchasing a tangible product it seems even harder to place a price on what you are offering. This can also distort your clients’ perception of the value they are getting.
And since some or many of the businesses don’t publicise or advertise their rates or charges right up front, it’s like squeezing water out of a rock trying to understand average market rates to see where you stand compared to the prices or rates of your competitors. This is very common in IT services, consultants, speakers, trainers, and other skill-based personal services.
Personally, I also used to have the same challenge — not knowing what to charge for my services. I recall five years back in my third (3rd) year of employment with a young consulting firm, our principal introduced an hourly rate billing system per project.
You could calculate how many hours you would need to spend on a particular client’s project or work and then multiply the hours by your rate and establish how much to charge, after establishing the other expenses for the project like transport for field work, welfare and other expenses, etc.
However, a year later after leaving the firm, I found it hard practicing the hourly rate because you just had to work on a client or project for the money hence billing yourself low for every heavy work or being taken unserious by probably well paying clients or overbilling willing-to-pay but small clients. I urge you to desist from that if you’re a service provider.
Our principal used to say ‘time is money’ and consulting work is time consuming. You have to burn time and your brain, nothing else.
So, after two years of charging clients any amount I wanted, I decided to revisit the prior practice — charging per hour — just consulting and not for all actual work after closing the sale. Of course there have been several rejections and complaints from prospective clients about my approach, which is okay. Most times it helps you eliminate or sieve out the unserious clients.
On the other hand, willing-to-pay clients will take you seriously. So, a month or so ago, I happened to have an email from a prospective female client who was asking about investing in financial instruments, stocks and investing in other alternative business ideas, pitting stocks against financial papers, and coming up with business ideas to venture into.
When we talked on phone before meeting, I assured her that I will bill her per hour for my time, after she asked how much I charged. Now, a client who needs your time and services and knows your value talks that way. I told her, I will charge you UGX50,000 per hour, which she agreed to and set up a meeting. I normally charge US $15 for clients outside Uganda.
Come D-day, she indeed paid but at the lower end. It’s really fulfilling to see a client value your time. She even went ahead to say that I should charge a higher but fixed rate. Who doesn’t want that? Chatting more with her revealed that people who see value in something actually look for it and even go ahead to pay minus complaints or hesitation. They say ‘if you want something go for it’.
I also know other professionals who charge differently for their services. These disparities are very common in IT professional and other service providers. The hospitality or tourism industry usually charges based on packages; same to media practitioners or service providers.
But you just need to know that there is no hard or fast rule on how you should charge for your services as far as pricing models are concerned; for your projects or work. However, below are a few service or project pricing structures you can use basing on your industry.
1. Standard unit pricing — For example most utilities like water, sewerage services, power bills, etc where units are given a rate or tariff. Usually in some of the sectors, government can set a rate or tariff. Rates can also be charged basing on time and volume.
2. Project-based pricing — Pricing your services or project basing on how you have always been billing similar projects, for instance setting a fixed rate for website designing, business plans preparation, etc. This comes from you to the client, usually size of projects or work may matter.
3. Performance-based pricing — This is a bit tricky but you determine what to charge basing on the results of your work or project. Usually comes after the work has been done. If the result is beyond expectation, you bill highly, but if below expectation, you will need to accept a lower payment. Very tricky as it may cause disagreements.
4. Combination rate — For services that are complimentary but having independent rates. For example, tour companies will charge you a block fee that has other independent services like park drives, ziplining, gorilla tracking, accommodation, etc. This technique helps the service provider hide the many rates per service into one block figure to also not scare the prospective clients.
5. Hourly rate — Billing basing on the number of hours worked or you plan to work or complete a project or service you offer. This is one of the easiest if you are professional but individual service provider. One model may not work for you — so it’s fine to switch it up as long as both you and your client are comfortable with the pricing and you are transparent about any costs.
6. Period-based retainer rates — For example a monthly rate for website troubleshooting and maintenance, quarterly rate for internal systems audits or reviews, etc. This applies where the client has been retained and a services-based contract signed.
Just be aware that your pricing model, especially the hourly rate will widely vary by depending on the client or project or industry, understanding the different pieces that go into choosing a way to charge for your services. You may adjust your billing or pricing model to charge completely. You will have to consider things like;
1. Market rate/fees; what others or competitors charge in the market
2. Location; we you live where you do your work from is an important factor in what you charge for your services — is your locality densely or sparsely populated, do you work remotely or on site?
3. Competition; time to do your home work, know what you competitors are upto in deciding your offering, what are they charging for what, their experience plus skills and certificates could be impacting their prices/fees.
4. Negotiation; would also affect your rate/fees, it should be a win-win so that the client’s needs are met and also not to lose the customer. Client relationships are crucial. You want them to keep coming back for your services or referring you to others.
Most times if you offer project based services you will need to calculate how many hours you will spend and how much to expect as payment. If you have more than one project, it will help you allocate hours for each and still be able to accomplish both beating deadlines of submission. If you don’t know what to charge as your hourly rate, use this simple formula.
First thing to do is to get your past or most recent salary and divide it by fifty-two (52) weeks (number of weeks in a year). Get the quotient and divide it by forty (40) (the average work hours per week). For example, if your past salary was UGX1,000,000, get it and divide it by 52 to get UGX19,230. Get the UGX19,230 and divide it by 40 to get UGX480 — this then was your past hourly rate.
Another way is to get what you would like to earn or be paid, then apply the same formula above; maybe UGX2,000,000 instead of UGX1,000,000. For service providers like consultants, website designers/builders, software developers, architects, etc., time is money. Tracking your time is essential for billing clients and making sure you get paid for the work you have completed.
Consulting hours consist of time you have worked on the project, as well as travel time. Accurately tracking hours means accurate invoicing and accurate estimates for future consulting projects. Use Ms-Excel or tailored software.
To conclude, like all things in business, your fees or rates or charges is a work in progress. Always keep improving them and don’t forget that factors of experience (with portfolios) and knowledge improvement or upgrade (like personal learning or self study or certificates) is key in this case.
A skilled and/or experienced professional and an apprentice can’t get the same salary. Can they?
NB: This article also appeared on Medium by the same author. Click here
About the Writer
Julius Masaba is a private investment researcher and business consultant; a WordPress writer/blogger on start-ups, entrepreneurship, business and finance. He’s also the Business Development Lead at Ablestate, https://www.theablestate.com/ . He loves tech. Visit: https://consultmasaba.com/