Pricing is a very important element in running your business. It can either break or build it, so it needs to be done correctly.
MELITTA NGALONKULU: Hello. On this week’s Small Business Conversations podcast we discuss the importance of pricing your services and products correctly. In recent weeks we’ve seen many articles in the media reporting on PPE-procurement scandals related to overpricing, which made me think that we might need a few lessons on the right way to price products and services for small businesses. I am your host, Melitta Ngalonkulu. This week we are joined by Tyronne Nel, the director at SME Snapshot. SME Snapshot is a fintech operator, which helps entrepreneurs compare the profitability of their businesses to industry peers.
Tyronne, it’s a pleasure to have you join us. Please tell us about the financial analytic system which you have created to assist small businesses with their pricing.
TYRONNE NEL: Hi, Melitta. Thanks for the invite. It’s a pleasure to be on the show. SME Snapshot is a financial analytics dashboard that helps SMEs get a better understanding of their financial ratios and what their business is doing in real-time. Essentially, as the accountant is busy doing the bookkeeping, the information is being pulled up straight from the accounting platform into SME Snapshot, and then the entrepreneur can get a much better feel of where the company’s going, and whether there are strategies in place to help them. And are the things they have in place making sense? So that’s essentially what it is.
It’s a real-time analytics dashboard that gives coaches, mentors and SMEs an opportunity to see what they’re doing, and how they compare against their peers in real-time.
MELITTA NGALONKULU: Is this software expensive – or is it affordable for most SMEs?
TYRONNE NEL: It’s incredibly affordable. What we’ve done is, we didn’t want to exclude any SMEs. The idea is, data like this is often very pricey, so we built a product for literally R100 a month, and it gives real-time analytic stuff. We pay an advisor coach thousands a month [so] you can see in real-time through your bookkeeper just doing your books.
MELITTA NGALONKULU: How long has the software been in existence?
TYRONNE NEL: It was originally built on an Excel template – as we always do with these things. It’s been live now for just over 18 months, and we are busy expanding into the market via accounting firms, and funders as well, who want to use it in order to assist SMEs to get funding because now they can see that the product is in real-time financials.
MELITTA NGALONKULU: Having a pricing strategy is something that’s very important when you have your own business. So for what reasons would you say that this is of utmost importance, especially during a time such as Covid-19, when most businesses are cash-strapped?
TYRONNE NEL: Yes, the pricing is definitely key. It’s also important to remember the sector you are playing in because people, especially entrepreneurs, need to understand pricing for, say, a manufacturing or a retail business is different from a business that sells time like accounting, or where you are actually consulting. So it’s crucial to understand pricing, because pricing is not just the rand value, but also the additional value you give to your clients.
So, if you have a physical product, obviously there’s a cost to that product. You might make enhancements to it, and you might have to move it from point to point to get it to clients, or pick it up from a distributor. All of those factors must be taken into account when you’re pricing your product – what margin you want. The key here is understanding the profitability on each sort of line-item because, when you stand in front of a client – especially now during Covid, when money is tight – and the clients says, “Can you give me a better price?” the quicker you can understand that, if you’re making R10. immediately you can tell the client you can drop the price by X, and immediately know you’re making R8 or R7 or R6. That’s key. So you can answer questions almost immediately, because in this entrepreneur space things move fast; if you have to go back and go and work out a quote for three weeks, you’ve lost the sale. So understanding your pricing is important.
And then also for people who sell time – consultants, lawyers, accountants – we’ve worked out that, on average, if you take away your leave and your sick days and things like that, you’ve got about 1 600 hours a year that you have to sell your time. That’s the time you have available. So if you want to earn X number of rands a year, divide that by 1 600 hours, and see where you fit on the scale.
So it is quite important to understand it because you’ll find that, if you use attorneys as an example, you’ll find how some attorney is charging R15 000, R16 000 an hour and think, my word, how can that even be possible? But that is a fact. Obviously, experience builds into it, and things like that. As a startup person, you might think, well, I’m starting up, I don’t have much experience, and I know the industry average might be R400 an hour; maybe I should come in at R250 until I get a few more clients under my belt.
But then, how the price process also comes into place is you have an office to rent, a car to drive backwards and forwards, things like that, and you build those costs into that price. Then you can see, hold on, at R350 an hour I don’t make any money. So clearly I can’t beat R350 an hour. That’s why it’s important. The key with pricing is understanding the costs that make up the price, and then your margin above that. And your margin is generally where you can play with clients. We always advise small and medium enterprises, “Go in at a much higher price, definitely, so you’ve got space to actually reduce your pricing when the clients asking you maybe for a discount or things like that.”
MELITTA NGALONKULU: Tyronne, the business industry is very competitive, so how do you avoid price wars, because you obviously want to gain new customers on a daily basis, if that’s how your business operates. So how does one find the balance?
TYRONNE NEL: This is something that entrepreneurs struggle with a lot, because they always fear that maybe I’m overpriced, or maybe I’m not, I’m not pricing enough – things like that. So what we find is a lot of entrepreneurs tend to err on the side of caution, and don’t charge enough money. They should really be charging more.
So how do you avoid a price war? Effectively, you’ve got to set your values. You’ve got to set, as an entrepreneur, what you are selling, and what are the value-adds, are because customers are always moving up and down the price range. There are always wealthy people whose circumstances have changed, or large companies whose income has changed. They’re now moving down the price scale because they’re looking for cheaper suppliers or cheaper service providers.
And of course, on the other side of the scale, you have companies which are growing and people who are actually becoming wealthier, and it’s going the other way. They don’t want to deal with a R300-an-hour person because they feel that they should be dealing with a R1 000-an-hour person. So these people are moving up and down the price range all the time. We’ve always found that, if you can find your value – people pay a price, but they buy value – that’s quite important because, if you start equating back to the time calculator, in fact, at R1 000 an hour, you have no time to do all the work. The way you change that is you put your prices up. Some of the clients will fall off, which wouldn’t make a difference because now you’ve got more time, and you’re being paid more. So your rand value is not changing, but you’re earning.
The same with your products. There are different sectors of the market. Some areas of the market won’t pay R35 for a cappuccino. Other sectors of the market are quite happy to pay R70 a cappuccino. You’ve just got to find where you’re going to fit into that. And obviously, because of its value, if your cappuccino comes with a slice of cake and an nice view of the ocean, you don’t mind paying R70 for that cappuccino. So that gives you an idea.
A price war really comes into a place where you’ve got large retailers who are trying to drive feet in and out, because they need lots and lots of volume. But we found mostly in the entrepreneurial space you don’t find a lot of the smaller players engaging in price wars.
MELITTA NGALONKULU: We are aware that SMEs do tend to overprice when quoting for the government. In your view, why is that, and how can we move away from this behaviour?
TYRONNE NEL: I actually want to change the misnomer here. SMEs generally don’t overprice when quoting anybody, including the government. What you find is that there are opportunists, and opportunists always overprice because they generally have an inside hand, where they are informed “What you’re asking for – we can pay more. So rather drive up your price.” You see this in the corporate world as well. You might know somebody who works in the company where you’re going for a quote.
A personal example I’ve got is, when I started consulting in the early days, I was dealing only with small and medium enterprises, and then a large corporate asked me to quote. When I prepared my quote I went to a friend of mine who deals with large corporates, and he said: ”There’s no way – your price is too low. Corporates are expecting a higher price.” I had to literally triple my price, not in the sense that I wanted to charge the client more, but so they would take me seriously and actually give me the business.
So there are two elements to that. If you’re looking at what we see now with Covid tenders in South Africa, that’s pure opportunism. People know they can get away with it. Generally what you are finding with SMEs is that they’re under-pricing. This is obviously a lot of the reason why SMEs fold; they don’t make their cash flow properly. They’re so scared they don’t get the work that they are actually under-pricing. They need to get a better understanding of the pricing market and things like that.
So, where you find overpricing, especially in the government environment, SMEs have been pretty much forced into padding their prices to pay bribes or pay an entrance fee, or “It’s family, so we’ll get the money anyway. It doesn’t matter how much we price.” That unfortunately affects the proper entrepreneurs. You’ve got to separate them away from the opportunists in that space because – you always hear the stats – nine out of ten small and medium enterprises fail in their first year. And that’s the very reason. They are under-pricing themselves and their actual service.
MELITTA NGALONKULU: Now, Tyronne, how does one even start with the marketing study of your industry? Let’s say that I am in PR – how do I know what my peers in the industry are actually charging?
TYRONNE NEL: That comes up quite a lot. There are very few new and unique innovations. It’s not every day that someone comes in and invents the iPhone or something like that. Everything’s sort of an iteration on something before. So you see all the pizza shops, you see the number of PR firms, as examples.
Generally we have had a job at a company doing something similar, and we’ve broken off into our own firm; we’ve got a feel of what they’re doing. So get on the internet, the internet is gold. And just go covertly through your Gmail or email address, and say, “Hi, I’d like a quote for your service, please,” and the hungry entrepreneur or other business out will quote you. Now you know exactly what they’re charging, what the breakdown is, all that type of stuff, and you can fit within that space.
The truth, however, is that if you are unable to do the work, that’s always going to come back and bite you. So the idea is to get the right insights, get an average pricing. That’s easily available through things like the internet now. Back 15 years ago, before we had access to the internet, as we do now, it was much harder. But nowadays it’s easy. If you contact a whole bunch of competing firms, you can get a good average. You can sort of get a feel where you fit in that space. Would you be able to charge that price? Can you compete with those services? And you’ll determine from there, as your workload increases, if you can increase your prices. Or you might feel no, no, I’m happy with my pricing , and you increase your staff complement and grow your business [instead]. And because of that the quality of the service and the value-adds, your business grows accordingly.
So price is important in terms of cash flow to pay for expenses; but value is way more important in terms of the actual customer offering. We’ve seen it everywhere. Two simple examples. If you want to go to the mall and buy a pair of jeans at Edgars, you can buy a pair of jeans for R300, or Levi’s right across the aisle for R1 500. They’re essentially of the same material, but we pay more because we believe in the value of the other one. And that’s exactly the same thing with SMEs. Value is what people pay for.
MELITTA NGALONKULU: Tyronne, thank you so much for your time.
TYRONNE NEL: And thank you. It’s been a pleasure having a chat and being on your show.
MELITTA NGALONKULU: That was Tyronne Nel, the director at SME Snapshot. It’s an SME fintech company that assists small businesses with accounting tools.
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