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10 pricing strategies you need to know as a small business owner

10 pricing strategies you need to know as a small business owner

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Pricing strategies

Are you about to start a new business? Well, congratulations in advance. Now, you’ll have to put a lot of thought into how you are going to price your products and/or services. It takes more than calculating your costs to set a price. It requires research and understanding consumers and the market.

To fix an effective price, you have to consider the following:

  • The production and distribution costs
  • What consumers are willing and able to pay for your product
  • What competitors are doing
  • Market conditions
  • Your profit margin

There are different pricing strategies available to you. Each one depends on the factors mentioned above. Knowing what you want to achieve either as a startup or as a growing business will help you choose the right one.

[CHECK THIS: Dangote Flour Mills seeks market dominance, unveils new product]

What is pricing strategy?

Want to get those goods off the shelf? Then you need a pricing strategy. This simply has to the different methods with which you can fix a competitive price for your goods and services. With the right pricing strategy, you can attract and retain customers, and be able to maximize your profit. Here are 10 you can choose from:

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  1. Pricing for market penetration
  2. Psychological pricing
  3. Premium pricing
  4. Value-based pricing
  5. Promotional pricing
  6. Geographical pricing
  7. Captive pricing
  8. Economy pricing
  9. Price skimming
  10. Bundle/product line pricing

Let’s get right to it, shall we?

  1. Pricing for market penetration

As a new business, the biggest challenge you might face is convincing consumers to patronize you. They already have established businesses they’ve been buying from. In such a scenario, you can use market penetration pricing to create brand awareness and gain market share. It involves setting a lower price than your competitors or providing some free services until you earn a considerable customer base.

For instance, if competitors sell for 100 naira, you can sell yours for 95 naira. You could also do a giveaway or offer free delivery as a way of introducing yourself to the market.  Adopting this pricing strategy may mean you have to endure some initial income loss but it will help you draw attention to your product, set up a customer base, and gain consumer loyalty. It may even boost your profit over time due to an increase in sales.

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After you’ve succeeded in penetrating the market, you can then increase your price to reflect the value of your product.

[READ THIS: Difference between an Emerging Market and a Frontier Market]

  1. Psychological pricing

This type of pricing is meant to trigger an emotional, rather than a logical response in a buyer.

For instance, setting a price of 199 naira instead of 200 naira will create an illusion of a cheaper price, although the difference is only 1 naira. This often works because buyers notice the first number on a price tag more than the last.

Psychological pricing makes consumers feel like they’ve saved money or received greater value.

Another example of psychological pricing is when competitors are increasing their price (perhaps because of an increase in production cost) but you reduce your quantity/quality and keep price the same.

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  1. Premium pricing

You can use this pricing technique when you have a unique product or service no one can compete with. It has to do with setting a high price for your offers, which creates an impression of value in the minds of consumers.

[READ FURTHER: Airtel Africa joins the league of worst debuting stocks in Europe this year]

But to ensure that buyers perceive your offer to be worth the price, a lot of factors such as high quality, fresh experience, packaging, and marketing strategy all have to combine to support the premium price.

This type of pricing is often used for luxury cars, 5-star hotels, precious stones and jewelry, fancy restaurants, pleasure cruises, etc. The higher the price set for such products and services, the higher the perceived value amongst consumers.

  1. Value-based pricing

What people are willing to pay for your product or service has a lot to do with what it’s worth in their eyes. Recognizing this and setting a commensurate price is known as value-based pricing.

The perceived value to a consumer depends on how the product or service meets their wants and needs.

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  1. Promotional pricing

Promotional pricing is a very popular pricing technique. Though it’s an old concept, it remains successful to date.

It involves promoting a new or existing product or service by offering discounts, buy one and get one free deals, attaching a gift, etc. It is very effective in driving sales.

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This strategy works best with a deadline or offering a limited stock. It motivates buyers to act fast by playing on their fear of missing out.

You can use promotional pricing to create excitement for your product/service. It may even lend you customer loyalty.

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  1. Geographical pricing

You can change the price of your product when you expand your business to a new state or country. Location affects price due to factors like shipping costs, market demand, cost of raw materials, tax, currency exchange rate, and so on.

Let’s take some examples, if you sell sweaters during harmattan season, the price tag will be lower in the east than in the north. Why? People will still be willing to buy despite the high price due to the much colder climate in the north.

Supply and demand also determine geographical pricing. If you move to an area where your product is scarce, it is expected that your price will go up.

Also when the government in an area imposes high tax so as to generate revenue, the product will be more expensive than in other areas where tax is low.

  1. Captive pricing

If you sell products that customers have to update or renew regularly, then you should consider captive pricing.

Let’s take an inkjet printer as an example. When you buy the printer, you’ll need to replace the ink cartridge once in a while. Without the cartridge, the printer cannot be used.

The buyer has no other option than to keep purchasing the cartridge. Thus, the manufacturer holds customers “captive” unless they decide to stop using the printer.

They can keep increasing the price of the secondary product as long as it does not exceed the point where the customer is forced to purchase a new printer from another manufacturer.

Another example is when car owners have to get a driver’s license.

  1. Economy pricing

This pricing strategy involves keeping your production and marketing costs as low as possible with the intention of selling at a comparatively lower price and still be able to make profit. It is used to attract price-conscious consumers.

Economy pricing can be adopted by large businesses but is not advisable for startups and small businesses. The reason is that the latter lack the sales volume which bigger companies enjoy. Also, producing on a large scale helps lower costs and small businesses won’t be able to do that. Another reason is that economy pricing often involves forgoing branding. As a startup or small business, branding is important to create awareness and differentiation for your product.

  1. Price skimming

Price skimming is used when a new product is released in the market. It has to do with setting an initial high price and reducing it gradually as more people adopt the product and competitors begin to enter the market.

This pricing strategy can be seen with the introduction of new models of smart phones, TVs, cars, and so on.

It provides the benefit of maximizing profit on early adopters, enabling you to recoup the cost of developing the product. You can then lower the price subsequently so as to attract more price-sensitive consumers.

Price skimming creates a sense of exclusivity and quality when the product first enters the market.

  1. Bundle/ product line pricing

To push out inventory fast, you can offer a bundle of products at a cheaper price than what it would cost the consumer to purchase each item alone. For instance, if you sell hair cream and hair brushes, you can offer both together at a lower total price than if the buyer was to purchase the cream alone or the hair brush alone.

This pricing strategy helps improve the perceived value of your offers since customers will feel like they are getting more for their money. It is also helpful in increasing sales for a slow-selling product by offering it alongside another that sells fast.

Bottom line

Depending on your business goals, there are a number of factors you should consider before setting a price for your product or service. A good pricing strategy is essential in ensuring you make adequate returns and keep your business afloat or ahead of the competition.

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Personal Finance

How to improve your investing habit

Valuable tips to help you improve your investing habit and make more money.

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investor, Steps to investing, Steps to developing a growth plan for your business, Breaking down the biggest misconceptions young people have about investing , Here’s how your business can grow revenue in tough conditions (PART 1), Here are ways to find the right investor for your business, How to build up your investment knowledge, This simple advice could help solve your investment challenges 

The best route to financial freedom and wealth is by saving and investing your funds. With the rising inflation rate in the country, money saved in the bank is useless and would depreciate with time. The best thing to do as a smart person is to invest your money and sleep while your money works for you. Investment entails more than just knowing about the stock market and investing, it involves having a healthy investing habit. It takes a lot of study and growth to imbibe these habits. Keep reading for tips on how to improve your investing habit and make more money.

Keep at it 

A good investor doesn’t start today and stop tomorrow. You have to be consistent with your investment plan and learn not to eat all your returns. Reinvest your interest and keep investing till your last breath, that is how you make more money. When Albert Einstein was asked what man’s greatest invention was, he said ‘compound interest’. According to him, “compound interest is the eighth wonder of the world, he who understands it, earns it; he who doesn’t pay it.” Imbibe the art of reinvesting today and keep at it.

READ: 10 Actions That Can Make You a Succesful Investor

Have a plan

‘A goal without a plan is a wish.’ Having defined your financial goals, you should come up with a plan on how to achieve your goals. Gone are the days when you just invest blindly. To improve your investing habits, learn to plan ahead. Decide what to invest in, look out for the risks involved in your investment, calculate your interest rates and see if it would benefit you, and track your investment.

READ: Studying after COVID-19: How education will be changed in 2021

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Spend more time on research 

“It has long been the prevalent view that the art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries”
An excerpt from the book, “The Intelligent Investor; The Definitive Book on Value Investing” by Benjamin Graham, updated by Jason Zweig.
The importance of research cannot be overemphasized. As a smart investor, you should do thorough research on the industries that have great potential and would give you better results. You should also do in-depth research on the risks involved in investing in specific industries. Arm yourself with enough data before investing.

Learn from your mistakes 

There is no successful investor that has not made a financial mistake or lost money due to some sloppiness. However, what makes you a better investor is the ability to learn from your mistakes and move on. This rule applies to all facet of life so it shouldn’t be new to you. If you make an error in your numbers or make some huge mistakes, pick yourself up and try again.

READ: MTN Nigeria records gain, investors profit up by N42 billion

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Wait on it 

You can not be an investor and not know how to be patient, disciplined and eager to learn. One of the habits of successful investors is patience. You have to learn how to let go of your funds and let it come back to you when it is ready. Also, the market won’t always be proposing huge returns or favourable investment plans; your patience will go a long way in helping you survive situations like this.

READ: Fidson reports over 500% increase in profit for 2019

Be a copycat but also think for yourself 

Do research on successful investors, find the ones that have the philosophy that aligns with you and follow their steps. You cannot know it all. You should also learn from their mistakes along the line; that is the key to becoming better than them. You must also be able to harness your emotions and think for yourself as an investor. Don’t underestimate the power of your intuition.

In addition to the tips listed above, below is the Buffet approach to investment, extracted from “The Warren Buffet Way: Investment Strategies of the World’s Greatest Investors” by Robert G. Hagstrom.

Explore the Nairametrics Research Website for Economic and Financial Data

  1. Never follow the day to day fluctuations of the stock market.
  2. Don’t try and analyze or worry about the general economy.
  3. Buy a business, not its stock.
  4. Manage a portfolio of businesses: Intelligent investing means having the priorities of a business owner (focused on long-term value) rather than a stock trader (focused on short-term gains and losses).

We wish you well on your investing journey.

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Personal Finance

6 things you must not do with your money

Money can go as fast as it comes, but you might just get to keep it for a long time if you follow these tips.

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Coming across this, you probably thought to yourself “what an interesting topic, I wonder what it has to say”. Well, we are right there with you. There are a lot of things you shouldn’t do with your money and even without reading further, you can probably outline about 20 things, (go ahead if you’d like to).

Trust me you’d have fun doing that because it was quite fun coming up with this list and we’d like to present to you the top 6 things we believe you must not do with your money. Have a fun read.

DO NOT BE UNINTENTIONAL WITH YOUR MONEY

Intentional living is important and it is something that has caught on over the years. To be intentional means to be deliberate in your actions and decisions. Basically, what you must understand from this is that you should not be impulsive with your money, whether in your spending, savings, and investment decisions, you must be deliberate. There is a popular saying that goes “failure to plan is planning to fail”.

It is necessary to always have a plan/budget for your money. Never leave your money to chance. Be intentional, be deliberate, and do not be passive with your money plans. To get started, you can focus on three steps; have a vision, create a plan, set limits. You can decide to be intentional with your impulse buying as well. When you create a plan and set limits and you do not go over that limit, even when you decide to splurge, you would still be on track to achieving your goals.

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DO NOT MAKE LARGE PURCHASES WITHOUT CONSIDERING THE FULL COST

Part of being intentional with your money is to avoid large purchases if possible. Things like buying a car or land/homeownership should not be taken lightly. Even if you can afford the down-payment at that time, you have to consider the other charges and fees attached. If you can meet up with maintenance and servicing then, by all means, go ahead. Otherwise, it’d be best to review that decision. One way to achieve such purchase though, if your current earnings aren’t sufficient to support an extravagant purchase is to have a savings or budget plan for it.

Even if you cannot afford a financial advisor, there is a good number of mobile apps that would help you make such a savings plan. If you are the type of person that whenever you come upon ‘windfall’ or unexpected income, you’re already thinking of how to spend it extravagantly, you need to have a change of perspective. Before you think of buying that private jet or getting that car, you need to ask yourself if you are fully capable of maintaining it. Making rash purchase decisions can lead to regrets later.

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DO NOT CASH YOUR PAYCHECK RIGHT AWAY

With the advancement in technology, most employees have the option to have their earnings paid directly into their bank accounts, rather than collecting cheques or cash. But no matter the form you collect your money; you must make provision for part of that money to be saved. Do not spend it immediately. You can automate payments such that a percentage of your monthly income goes directly into your savings account.

This helps to avoid the temptation of dipping into that fund because, “if you don’t see it, you won’t spend it”. Some companies provide retirement savings plans for their employees, a system whereby a portion of their salaries are deducted and paid directly into their retirement account. One such plan is the 401k, of which the Nigerian alternative is the Nigerian Pension Scheme, governed by the National Pension Committee (PENCOM).

(READ MORE: Cashless goes nationwide)

DO NOT PUT ALL YOUR MONEY IN ILLIQUID INVESTMENTS

While investments are fun, and a good way to build wealth, it is important to diversify and have variety. Remember the saying, “do not put all your eggs in one basket?”. The difference between liquid and illiquid investments is simply this; the ability to exchange something for cash. So the rate of liquidity is determined by how easily an investment can be converted to cash. Do not tie up your money by investing in illiquid investments. Your investment portfolio should be diversified.

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DO NOT SHOP EMOTIONALLY

The fact that we are biological beings does not mean we should not make logical decisions. Do not fall prey to ‘retail therapy’. Retail therapy is a term that is used to describe the action of shopping to improve one’s mood. It is also referred to as “comfort buys”, often acquainted with individuals who buy during periods of depression and stress. You are allowed to get emotional and you are also allowed to deal with that emotion, but talking to a sales representative or clerk just to make you feel better is not healthy.

Their job is to make sales, not your welfare. This is not intended to paint anyone in any sort of way but rather, to educate you. Instead of making that trip to the store or browsing that online catalogue, it would be better for you to call up a trusted friend or family member and talk with them. You’ll thank me for it.

DO NOT SIGN A CONTRACT YOU DO NOT FULLY UNDERSTAND

A contract is an agreement between two people that is legally binding. Four essential elements that make a document legally binding are; an offer, an acceptance, an intention to form a partnership, and a consideration that usually involves money. It can be oral or written. When it is oral unless recorded, there is no solid proof that an agreement was made, but, once it is written there is enough proof.

So before you go ahead and sign that piece of document, you must be fully aware of the terms and conditions of your agreement. Yes, a contract may, however, be considered invalid for specific reasons, but the bottom line is that you should avoid any situation that would put you in any money problem. It is more rewarding to get professional advice than implicate yourself unknowingly.

With all that’s been said, the crux of the matter is that you must be intentional with your money. Only then, can you plan, only then can you learn from your mistake, only then can you track your money movements, be deliberate, make decisions and take actions with a purpose. Develop a relationship with it (a healthy one of course), get to know your money, go on money dates and your financial health will bless you for it.

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MSME

FG says 174,574 successfully register for N75 billion MSME survival fund in 48 hours

174,574 persons have successfully registered for schemes under the Nigeria Economic Sustainability Plan.

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FG releases new details on MSMEs support scheme, budgets N200 billion for loans, FG says 174,574 successfully register for N75 billion MSME survival fund in 48 hours

The Federal Government has disclosed that a total of 174,574 persons successfully registered for the N75bn National MSME Survival Fund and the Guaranteed Off-take Stimulus schemes under the Nigeria Economic Sustainability Plan, within 48 hours.

The disclosure was made by the Minister of Industry, Trade and Investment, Ambassador Mariam Katagum, during a media briefing on the update of the schemes, on Thursday, September 24, 2020.

Mariam Katagum, in her statement, said: “As at 8.30 am this (Thursday) morning, total successful registrations stood at 174,574 with the following states having the highest applications as follows: Kano, 19,895; Kaduna, 13,575; Lagos, 13,640; Katsina: 8,383; Federal Capital Territory, 8,085.”

She stated that the registration for the MSME Survival Fund commenced on September 21, 2020, at 11 pm, and within 24 hours, approximately 138,000 individuals had logged on, created profiles and completed the first stage of registration with Kano, Kaduna and Lagos as lead states.

(READ MORE: Nigeria’s external reserves up by 7% in 21 days, currency speculators to lose over N10 billion)

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Going further, Katagum said, “All successful applicants received SMS and email verification with a list of requirements for the second stage of application which would commence on October 1, 2020. Applicants will be required to upload details supporting their applications which will be verified and if successful, approved for disbursements.”

The minister further disclosed the states that recorded the highest numbers of applications within the first 24 hours of registration; these are Kano, which recorded 16,880: Kaduna, 11,438; Lagos, 10, 530; Katsina, 7,354; and Bauchi, 6,622.

Explore the Nairametrics Research Website for Economic and Financial Data

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She also stated that registration for other tracks would start next with the hospitality industry coming on September 25, 2020, by 10 am; payroll support (others), September 28, 2020, 10 am; while artisan/transport grants would start on October 1, 2020.

Nairametrics had two days ago reported the opening of the portal for its N75 billion Micro, Small and Medium (MSMEs) Survival Fund and Guaranteed Off-take schemes with effect from 10 pm on Monday, September 21, 2020.

READ: Delivering mass housing as a path to Nigeria’s economic recovery

These two MSMEs initiatives namely MSMEs Survival Fund with payroll support track and the Guaranteed Offtake Scheme which are at the core of FG’s N2.3 stimulus package in the Economic Sustainability Plan, were introduced by it as part of the efforts to help businesses overcome challenges posed by the Covid-19 pandemic.

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