Blessing dreamed of owning her first iPhone on her 21st birthday. Wale, her boyfriend, took up the challenge to save enough money to buy her the birthday gift. On the morning of Blessing’s birthday, Wale went to a shop in Computer Village in Lagos, Nigeria, to buy the phone. He found that the retail price was higher than he expected. After four hours of fundraising, he rushed back to the shop to purchase it but surprisingly found that the price had gone up again. The shop owner had checked the current exchange rate in the black market that morning and had to increase product prices.
If you are a business owner, supplier, or manager in Africa, you must be aware of the sweeping avalanche of price increases rocking your business and the customers you serve. Prices of products and services in Nigeria’s retail sector have grown by 60% in the last 12 months. In South Africa, 60% of the country’s consumer goods recorded price increases as of the fourth quarter of 2021, and diesel prices have skyrocketed in the last few months in Kenya. Your sales forecasts are probably becoming more unreliable because prices don’t just change monthly but also weekly or even daily. Unfortunately, customers’ spending power is not growing as fast as costs increase, and shoppers’ incomes are falling in Africa.
The cost of doing business in Africa is rising due to high inflation rates, foreign exchange volatility, rising energy prices and shortages triggered by the Russia-Ukraine war. Customers may justify persistent price increases to stay alive. While increasing prices may sometimes be inevitable, there is a limit to the number any customer can bear when spending power is dropping in Africa. The fundamental question is, how can you price right when the target customer’s ability to pay is falling?
Knee-jerk reactions to pricing may have worked for firms in the past. Still, insights from a recent Afritail study suggest that unilateral price increases may accelerate the erosion of customer lifetime value in Africa. Three fundamental insights emerged from the in-depth analysis of Nigeria’s premium, mainstream, and value customers. The first is that value, mainstream and premium customers are willing to pay higher prices if the brand’s perceived value is high. This insight suggests that sustaining high-value experiences matters more to the customer than mere price increases. As one of the customers put it, “I expect a corresponding increase in value for any additional money I spend on acquiring a product or service”.
Another critical insight is that service exclusivity, quality of service delivery and purchase ambience are significant drivers of value for premium customers. In contrast, product or service functionality drives value among lower-end customers. As the channel partners of a company’s route to market (such as distributors, salespeople, retailers, agents, etc.) are the service custodians, this insight suggests that firms who increase prices while ignoring how channel members will enhance service experiences will suffer value erosion in the long run.
The study’s third and most important insight is that passing costs on to customers is the fastest way to lose those customers to competitors. Findings revealed that customers of all segments resented price increases from businesses passing costs on. Customers would stop buying, reduce quantities, and switch to alternatives because the passing of costs was perceived as unfair. These insights suggest that engaging the entire ecosystem in pricing can enhance the lifetime value of customers in Africa. Here are four tactics for pricing on the continent.
- Listen to the Customer and Regulator’s Voice: Customers resent firms that fail to consult buyers and assess their willingness to pay before increasing prices. For example, Netflix lost 970,000 subscribers in the first quarter of this year for introducing “extra home fees,” which increased service prices. Banks in Kenya were sanctioned for raising hidden mortgage prices, and customers in Nigeria are protesting outrageous bank charges. Customers want to have a say, be heard, and consider their opinions. Regulators also play a critical role in pricing, and it is essential to consider their views. Continuous communication between firms, regulators and customers is vital to achieving this objective.
- Understand your competitors’ cost and price structure: Knowing your cost structure is not enough. You must also understand your competitor’s cost structure. For example, a market leader in Africa’s noodles market did not raise prices when its competitors did because it understood the cost structure of its competitors. You may have a pricing advantage if you use market intelligence to identify freight, distribution and service costs that span out of a competitor’s control. This information can help you decide when to increase or maintain your prices in response to competition. Likewise, researching the components of your competitor’s price structure, such as bundles and metrics, can offer opportunities for differentiation. Globacom Limited disrupted the telecommunications industry of Nigeria in 2003 by introducing pay-per-second billing rather than the per-minute billing that its competitors used.
- Consult your channel partners: You cannot set prices without considering the tasks your partners carry out for the end consumer. These service functions come at a cost, and channel partners differ in their ability to deliver lessons at a reasonable price. Build in the value drivers that your channel partners contribute to your pricing process. Let your channel partners participate in pricing discussions. Imposing costs down the channel can destroy relationships critical for delivering customer value in the long run.
- Revise your brand portfolio strategy: Avoid passing costs directly to customers when their capacity to absorb higher prices is dropping. Step back and take a longer-term view about pricing products or services in your portfolio. One way may be to ease the customers into price increases over six months while supporting the increases with promotions and gifts. Another approach may be to distribute the impact of price increases across the portfolio. You may choose to go for higher price increases for your premium customers, marginal increases for your mainstream customers and zero increases for your low-end customers. You may be able to spread the risk of price increases across your portfolio if your brand equity is strong enough to withstand the threat. At other times, it may be advisable to shrink your brand portfolio to accommodate price increases and stay profitable.
Pricing right in Africa is a strategic process that involves active stakeholder engagement. The continent’s economic decline is not an excuse for knee-jerk reactions to pricing. A holistic approach will drive sustained customer lifetime value on the continent.
Uchenna Uzo, Faculty and Academic Director, Africa Retail Academy, Lagos Business School
Feyi Olubodun, Founder and Managing Partner of Open Squares Africa
Chris Ogbechie, Dean, Lagos Business School and Professor of Strategic Management