Pricing Services Right: The Dilemma of Small Businesses in Kenya

By Stephen Osomba

The number of small businesses in Kenya has increased tremendously. This has been mainly attributed to lack of adequate formal employment opportunities forcing many to be creative and start their own enterprises. The culminating impact of this trend is that they have grown to become the roaring engine of Kenya's economy by the sheer amount of the numbers that run into millions. According to the 2016 National Micro, Small and Medium Establishment (MSME) survey report by Kenya National Bureau of Statistics (KNBS,2016), there were about 1.56 million licensed MSMEs and 5.85 million unlicensed businesses. The numbers might be here at the moment. The report adds that MSMEs contribute 28.5 percent of the total economy. Most are in the service sector and the industry has become a dominant sector in every economy around the world. The contribution of services to the overall development of the economy has become more pronounced in recent years not only in developed countries but also in developing countries. The contribution of services to Kenyan GDP has been approximately 30% according to Institute of Economic Affairs (IEA). The expanding economy and markets opened the doors for many business houses to start their venture in the service sector.

Small Business Challenges

However, while the strides made are commendable, the small businesses are faced with unique challenges that threaten their very existence. Some challenges include lack of adequate managerial training, lack of adequate finance and limited access to credit, rapid technology changes, new laws and regulations, inadequate knowledge and skills, poor infrastructure, poor management of resources and inadequate support from the government. In the purview of marketing, apart from challenges in formulating well-grounded promotion, product and distribution strategies, small businesses in the service industry have found it difficult to price their services right.

Pricing Challenges

Selecting the pricing strategy and assigning the price for the services becomes a complex task to small firms. And it becomes extremely challenging for startups and more so those in the cut-throat competition dominated the field. The revenue model and pricing strategy a firm chooses will impact a wide variety of aspects of the business such as the type of clientele the firm deals with and viability of the business in the long run. This means deciding a pricing model is very important for any business survival. Business models of a company describe the rationale of how an organization creates, delivers and captures value. This is important to older and more established companies, but the concept has not been well established at small businesses. These enterprises lack a clear pricing strategy and have a haphazard approach to its pricing which puts them at a risk of failure. This is because they can end up underselling their services to remain afloat which in the long run would affect its longevity. In some instances, the approach has resulted in losses. The pricing strategy has to enable the company to achieve its vision of delivering quality services to its customers, and in particular, it must serve both the needs for profitability, sustainability, effectiveness, and efficiency. This, in the long run, will provide consistency and stability so that the appropriate financial resources are available, precisely when needed, and the company can be responsive to changes in the future.

Investigative Research

We conducted a case study research in one firm in the creative industry to investigate the pricing problems being experienced by small businesses and get a feel of how they go about their pricing. From the study, we established that this particular firm didn’t have a pricing strategy or policy in place that could guide pricing of its services. Asked why they didn’t have a pricing strategy or policy, the respondents said that it’s extremely difficult to set a pricing strategy for services and thus do not have a standard pricing policy. Thus, they have resorted to charging on a per-case basis and when doing, so they focus on how big the client is, nature and magnitude of the work, turnaround time, the quality and experience. Nonetheless, whilst they don’t have a standard pricing policy, they try to rely on the company’s strategic plan that contains financial targets to ensure that they remain on track.

Resulting Challenges

Lack of a basis for making pricing decisions has been hampered by lack of information within the industry. This has, in turn, made it difficult to know the going rate which has made them lose opportunities due to overcharging or undercharging which portrays the low quality of work. In addition to this, there is the issue of undercutting by competitors which have made it literally impractical to set competitive pricing. Further, the respondents reported that lack of standard pricing policy/strategy has impacted its business negatively in that they’ve had a few instances where they end up going into losses by assuming very many variables. It has also affected the strategic plan set out due to missed targets. Additionally, the company has also lost opportunities to competitors either because they were too costly or too cheap. Also, there is the problem of referrals coming in with the pre-determined price, therefore, it becomes difficult to price differently regardless of the difference in nature of work. In overall, its affected expansion of the company due to missed revenue targets.

Conclusion

Pricing strategy is depended on various factors, however, quality of work remains the leading determinant of a company's pricing policy. The intense competition within the industry has made it difficult for agencies like the firm under case study to compete as price undercutting tactics are prevalent. This has been occasioned by a high supply of freelancers who take any amount to remain afloat and in the process negatively impacting professional firms.

What now? Recommendations

While it may be difficult to set pricing for services, small businesses should have a minimum rate card. This will go a long way in setting some sort of control. The minimum price is the least amount the company can charge for a particular service. The price should include the minimum markup in line with the company’s profit objectives. When setting the prices, conduct an industry survey to know what the going rate is so that you do not overcharge or undercharge. Progressively, based on experience, you can develop a detailed profile of work done and calculate the average prices charged and adopt these prices as the going rate. These should be reviewed periodically and adjusted depending on the prevailing economic conditions.

EDITOR'S NOTE

*This is a reprint. The article was originally published on 30th October 2017 for SMD Consulting Associates. Some statistics stated on the article may have changed by now.

Stephen Osomba currently serves as the Lead Partner, Communication & Marketing at SMD Consulting Associates where he helps SME clients deliver value by adjusting the solutions to each company's mission, product, strategy, and industry.