The Price is Right!
One of the biggest challenges facing any future small business owner in the Philippines is determining exactly how much to charge for a particular good or service. Setting the price for your various goods or services really can make or break your business. And while there are various ‘rules of thumb’ you can use to set initial prices, chances are you’ll find that getting to an appropriate price takes time, and is influenced by a wider range of factors than you think. In other words, setting the price for your goods and or services becomes more of an art than a science.
Before developing any pricing strategy, you must first determine who will make up your intended customer base. Knowing what to charge has a lot to do with knowing who are your customers! What may appear to be a bargain price for a product to one particular customer may be an absolute extravagance to another customer. If you target higher income earners, you can adopt a strategy of charging a premium. In return you offer high quality products and services with very personalized service and in as exclusive and as attractive environment as possible. If your target market is made up of mostly lower income earners, you can instead adopt a strategy that allows customers to stretch their Peso. In this case you can offer less expensive alternatives to high end products. Sales volume is most important in this case, and keeping costs very low is what allows for a high sales environment. In exchange for discount prices, customers agree to no frills service and a very basic transaction environment. The key is to know exactly who is your target customer. You must not try and offer a premium product or service with a matching premium price AND expect to cut corners. Affluent customers notice small details, so don’t disappoint by thinking you can cut back and it won’t be noticed. Similarly, don’t offer too many extra services or perks if your strategy is to target the cost conscious consumer. Your small margins won’t allow for it. In other words, stick to a strategy that your customers expect. No more, no less.
Once you have determined exactly whom you want for customers, you can begin to come up with a pricing strategy that will match with their expectations. You will have to now determine whether your business falls into the price-maker or price-taker category. Contrary to popular belief, these are your only two options. Your small business will either be one of many other such providers of your good or service, in which case you are competing for your niche in the overall market and need to follow a price-taker approach to pricing. Or your small business is the very first of its kind in a particular market, in which case you will need to be the one to set the price of your products or services.
If yours is a typical small business and you offer a product or service that other merchants are offering, you will be a price taker. The market will already have a set, generally acceptable range that your pricing must fall in line with. There will of course be some variation in price based on different levels of actual service or convenience, but prices cannot vary too much or customers will switch to another provider. Your ability to charge more than the norm will depend on your small businesses’ ability to offer a more comprehensive service package than that of your competitors. If you can offer additional useful services, you can push the price upwards. If you cannot, you will need to compete by offering lower prices, or by keeping your costs lower than that of your competition.
If yours is a pioneer industry in your market, you will be responsible for setting the price of your goods or services. As a small business, you will likely either choose a standard markup when pricing, or look at introducing a cost-oriented price. A standard markup is usually a percentage added on top of cost of goods or services sold and all overhead costs. Some businesses apply a single markup across the board, while others have different markups for each sales category. Cost-oriented pricing is different in that prices are set individually for each product based on the cost of the goods or services sold, the overheads, and a desired profit that is set differently for each and every product line sold. For example, if you sell electronic equipment, instead of say a 50% markup across the range of DVD players sold, some brands will have a 50% markup, while others maybe more or less.
Lastly, I’d like to offer a few final words on pricing for your small business in the Philippines. Be very careful in computing markups, as it is easy to shortchange yourself. Many small business owners make the mistake of forgetting to include all the typical expenses when computing a final markup figure. The result is potential profits eaten up and margins squeezed so tight you have little or no room to move financially. As a rule of thumb, make sure your markup covers all administrative expenses, all selling expenses, and all losses resulting from merchandise discounts, theft, or product damage. In addition to this you need to add in a profit margin.
In addition to watching markups carefully, you may want to consider other ways to compete in the market place. If you are a pioneer business, try setting your prices on the higher end at the beginning with the intention of dropping prices over time as the product becomes more widely accepted and as competitors jump on the bandwagon. You may also want to try price bundling. In this strategy you can bundle for sale two or more products or services together and sell them as a package. Sales can be boosted because you can entice buyers into buying higher markup products if they also receive a lower markup product that is included at a discount. Overall you lose a small measure of profit, but you may be able to boost sales of higher markup products and increase cash flow in this manner.
Clearly there is more to pricing than one might have initially thought. If you are opening a small business in the Philippines, or are already in business and about to launch a new line of products, try to remember the above tips and suggestions. They just may help you get and stay on the right pricing track!
Hi Martin, again a great and informative article. In my different businesses I have to deal with aliens and their Philippino spouses. Sometimes I am amazed, if I hear the comment: “WHY ARE YOU SO EXPENSIVE? We are living here in the Philippines!” Even by telling the clientel sometimes, that there are even price differences between Manila, Cebu and Davao, I get the same answer: “If you would do your business in Manila or Cebu, you would have also higher cost of living!” What would you answer them?
Hi Martin and Klaus,This post has reminded of something i learnt many years ago ” Quality always sells”,regards Chas.
Hi Klaus,There are always some people who will always moan about price even if its cheap.If you give a quality service then that should be reflected in the price,regards Chas.
like your articles martin been reading them all ..Plan to go into a business in the Philippines in the next few years ..Keep up the good work …Phil R.
Does it matter what is your pricing structure after you have 9 people set up next door selling the same thing you are selling?
Hi Klaus,
Your problem is one faced by most small business owners. If you already have a steady customer base, it is because there are people who value your product or service. That does not mean other people who desire your product or service agree with your pricing. They simply cannot afford it or desire something different. In their case, they need to find an alternative business who can meet their needs at a price that they are comfortable with. One thing is for sure: “you will never satisfy 100% of people”. You need to concentrate on your target customers and point those who cannot afford your services towards someone who may be better suited to their budget.
Cheers!
Hi Chas,
Your comment brings to my mind another saying: “You get what you pay for”. That is why it is so important to know who makes up your customer base from the very beginning. If you target the correct market, you can build off an appropriate base. People who want premium products and services will seek out such establishments. People who want a great price will seek out bargain outlets. If you are clear about whom you desire for customers, your market will naturally gravitate towards your business provided you offer the level of service and price they generally expect. Some will never be satisfied at all.
Thanks for your comments!
Hi Phil,
Thanks again for your vote of confidence! I appreciate hearing from readers who are interested in small business in the Philippines. Hopefully you’ll find some of the topics of use to you as you prepare to enter into your own business.
Cheers!
Hi Ray,
Look at the bright side — if others are set on copying you, it is probably because you have been doing something great to begin with! Now, don’t get me wrong, this is a big challenge to overcome. However, if you can offer an even better or more distinct set of additional services, you should be able to keep differentiating yourself and your business from the competition. Plus, in most cases, I have noticed that the business that does all of the small things right and most consistently often wins the day.
Personally, I have seen more than half a dozen competitors try and offer a similar type of service to my own over the past 6 years. In each case my sales have grown, and the competition fell by the wayside! Why? Because people could judge the product and service they were receiving from my business, and over time I kept winning new customers over. Competition keeps you on your toes, and if you embrace the idea and know your business, you too should see that it helps you in the long run. Always stick to the basics — offer the best product, service, atmosphere, and convenience to your customers, at a price that truly provides value for money. That’s the basic formula that works for me and many other successful small businesses in the Philippines.
Good luck!
Hi Martin and Chas, thanks a lot. Great advices. Meanwhile we also got a lot of feedback like this: “Quality sells…”.Indeed, you get, what you pay for, Martin!
Hi Klaus,
One other thing . . . don’t take it personally if people don’t understand your pricing at the very beginning. They simply may have had no idea how much cost was involved. Usually all you need to do is write down a few simple calculations on the back of an envelope about where the bulk of the costs are located and why and then they will know why your product sells at the price it does. If they are not convinced afterwards, you have done all you can do and perhaps they can try to find someone else who better suits their budget.
Hi Ray- Personally, I don’t worry too much about having other people selling more cheaply than I do. I don’t go out to be the budget guy, I go out to be the premium guy. I offer the best customer service that the customer will find anywhere in the world, and I also offer the best of quality. Some things are more important to some customers than price.
Hi Bob,
You’re exactly right! You have decided on a target market for your products and services, and now you do what is necessary to keep those kinds of customers happy. In your case, quality is what customers are after.
Now I’m not sure what business Ray is in, but if he has targetted more price sensitive customers, he will need to be creative when moving forward. He’ll need to add additional services that can make his product more appealing (hopefully something that is personalized and does not drive costs up too much). And he may also want to look for ways to cut his own costs even more so than that of his competition.
Thanks for sharing, Bob! I hope this kind of discussion helps potential small business owners think carefully about who their actual cutomers are and what motivates them and how you go about keeping them happy.
Cheers!
Hi Martin
I am new here on this site. Do you mind me asking what is your business?
Hi Klaus
You say you get what you pay for. I think in the western world that is widely accepted. But does the average Filipino accept that?
Hi Ray,
I hope you keep visiting the LiP site. There’s plenty of great information and on a variety of different topics. I find that it is also important to read the contributions of the many individuals who comment here in the comments suggestion. There’s often a great deal of useful, first-hand information provided by folks who have a pretty good handle on various topics discussed.
I am in the specialty food and beverage business. My small business has been in operation here in the Philippines since 2002. I try to write columns that may be of interest to other small business operators in the Philippines. I write for as wide an audience as possible. Some of the topics may be of interest to you, others perhaps not. It really depends on the topic and stage of business you are at. Please feel free to make any contributions and suggestions whenever you like.
Cheers!
Hi Martin,Having spent many years running various business’s in the West.Some points that some readers may find of interest.These are just my opinions.Running any business full time is extremely hard work and long hour’s.If you intend to be successful at it,you must take it seriously and always strive to be the best at what you do,thats how you stay ahead of the competition.If you have no business experience in your home country,the risk of failure is very high.Do not think it will be EASIER in RP,business can be a cut throat business anywhere.To sell right,you have to buy right.Statistics show that the majority of new start up business fail in the first 3yrs.Most successful entrepeneurs had a few failures behind them before they found success.It is not my intention to dampen anyones enthusiam,but much thought and planning is needed before you start.You must be realistic.FAIL TO PLAN,PLAN TO FAIL. My reflections on readings from other forums over the years.”I intend to start a business in RP and let my Filipina wife run it (although she has no experience in business) while i chill out on the beach”,FATAL,can you believe that anyone would even consider that.”I will just start a part time hobby business and get by on that”,this rarely works in the real world.However, if you have another source of regular income that covers your living needs ie Pension,then a hobby business is ok.Hope this is useful to someone regards Chas.
Hi Chas,
Your list of points to consider is very useful. Indeed, if I were to create such a list, it would certainly include every point you have raised. That’s the beauty of this column — if people read it long enough, hopefully they will see that running a business takes tremendous effort to stay in business and even more effort to stay ahead of the curve.
Please feel free to add your thoughs whenever you feel like doing so. This part of the LiP site is meant to help encourage small business owners, but also add a sense of reality to the trials and tribulations faced while running a small business in the Philippines.
I am looking forward to hearing your thoughts and suggestions in the future!
Hi Martin, thanks for your additional comment and advices. Very helpful indeed!
Hi Bob, that’s exactly, what you told me before. Since that time, Rose and I are also following this strategy. it works…
Hi Ray, you are right, but 90 % of our customers ARE ALIENS. One more experience: most of them, who complained before our “high charges”, came back to us, after not getting the expected service, which has been some pesos cheaper…
Hi Klaus,
Thanks for dropping by again with additional feedback. I was wanting to add my own experience to Ray’s question, but since the question was addressed to you, I thought I would wait for your reply first.
As to Ray’s question on whether the average Filipino agrees to the saying ‘you get what you pay for’, I have to say that again it depends on your target market. There are different kinds of Filipino consumers, just as there are different segments of Japanese, French, or American consumers. So in short, I can say with absolute conviction that there are Filipino consumers who believe ‘you get what you pay for’.
How do I know this? Because in my small business, 97% of my customers are Filipino, not foreign. And yet my products are those traditionally desired by those with foreign tastes. I have found the affluent Filipino consumer to be extremely conscious about quality in purchasing everything from staples to durable goods to luxury items.
That is not to say that other segments of the Filipino market are more price sensitive. My point is that different consumers in any marketplace will have different needs and price points for various goods and services.
I hope this is useful.
I guess the affluent Filipino can be more discerning. Most of the Filipinos I meet do not fall into that category.
Hi Ray,
It’s hard for me to offer suggestions as I don’t really know your situation. If I can assume you really are concerned about competition in the more price-sensitive local market, some of the generic suggestions would be: try product bundling, extended hours of operation (if applicable), a customer rewards program (like loyalty cards used by coffee shops and sandwich shops), etc. Some of the above may help, especially if done in conjunction with an effort to lower operating costs.
Hi Martin, your additional comment was very helpful indeed. My businesses are very different then yours. Among others we are running a “documentation and translation service”, which includes assistance in the Immigration Office or any other Philippine authority.
Hi Klaus,
Yes, your business is different from mine in many ways. Some of the topics and comments will probably be more useful than others depending on how they relate to each individuals’ personal circumstances. I hope some of the additional discussion in the forum section was helpful.
Cheers!