By Oluwole Dada
In the last article, the issue of pricing as a factor that can cause the failure of a product was reviewed. The case of Econet (now Airtel), MTN and Glo was used to illustrate how products need to respond to changing dynamics in the microenvironment for them to remain relevant. Pricing a product without consideration of environmental factors can lead to the failure of the product. Today, the issue of pricing is still going to be the point of discussion but this time from a customer perspective. Entering the market at a price that is simply beyond the reach of the consumers can destroy a product.
This may sound like an obvious mistake. In practice, it is a surprisingly easy one to make. The organisation builds the business case for the product on a cost structure that may have been appropriate but is not appropriate for the destination market. It adds a margin target that reflects the organisation’s return on investment expectations. It models a price that makes commercial sense internally. It launches the product at that price without adequately testing whether the consumer in the target market has the capacity or the inclination to pay it.
Affordability of a product by a consumer may be due to several factors, one of which could be the reduction in purchasing power. There was a market shake in the Cola industry in Nigeria between 2015 and 2019. Prior to this period, the Cola industry in Nigeria was dominated by Coca-Cola and Pepsi. In 2015, there was the introduction of Big Cola which has a Peruvian parent company. They introduced 60cl of Cola drink at 90 NGN. The market players, Coke and Pepsi were being sold at 100 NGN for 50cl. That was a penetration price by Big Cola. However, this was coming at a time Nigeria was experiencing economic crisis and the purchasing power of the consumers had declined.
By 2016, another Cola variant, Bigi Cola was introduced into the market. They offered 60cl at 100 NGN. At this time, the market leaders, Coke and Pepsi should have realized that the bargaining power of consumers was increasing because they were having more options to pick from. Unfortunately, Coke made an error by increasing its prices. It offered 60cl at 150 NGN and 33cl at 100 NGN. That made them lose market share for two to three consecutive years before a price reversal was done in 2019. They were supposed to respond with competitive pricing after the new entrants offered penetration pricing. The matter was made worse as consumers were looking for cheaper alternatives because of the decline in purchasing power.
Consumers look at the price, look at the alternatives beside it on the shelf, and make their choice. The more options they have, the higher their bargaining power and the lower the bargaining power of the companies. Also, your cost structure determines the minimum price you can sustain. Your consumer’s purchasing power and competitive context determine the maximum price you can charge. If the gap between those two numbers is negative, that is if what it costs you to produce cannot be covered at the price the market will accept, then you do not have a pricing problem. What you have is a product viability problem that must be addressed before launch.
The most intellectually interesting pricing failure is the situation where a new product enters the market at a premium price without the brand equity or product differentiation to justify that premium. The challenge with entering the market at a price above the product with the largest market share, the deepest distribution, and the most established consumer loyalty is not primarily a mathematical one. It is a psychological one. The consumer who is considering your product does not make the purchase decision in isolation. They make it in the context of everything else available to them.
When Google launched the Google Pixel smartphone in 2016 at a price point directly competitive with Apple’s iPhone and Samsung’s Galaxy flagship range, it entered a market where the two incumbents had spent a decade building brand equity, ecosystem loyalty, and consumer trust. Google had a superior camera, objectively measurable, independently validated, and widely praised. However, it did not have the consumer relationship that Apple and Samsung had built over years. The market’s response was that the brand trust had not yet been earned at that level, regardless of the camera quality. Pixel’s market share remained stubbornly small for several years, not because the product was inferior in its technical specifications, but because the price implied a brand standing that the consumer had not yet awarded it.
Oluwole Dada is the General Manager at SecureID Limited, Africa’s largest smart card manufacturing plant in Lagos, Nigeria.
