Proximate value pricing for local technology
Charles Mezu is a true polymath. An artist, former banker and founder of the technology company Palette Computers. He named his company after an art tool. I only just realised that when writing this article. He is also a very shrewd businessman that I have learned a lot from over time.
He was one of the pioneers of Nigerian Computer Hardware sales and services. He initially sold more hardware than he provided services for, then later realised that the services part of the business was equally as valuable as the hardware sales. He turned that also into a business. He later knew that he had to differentiate the consumer from the corporate business because he could incorporate support services cost transparently into his pricing for corporate hardware but it was harder to do for the consumer side. He separated the consumer business and moved it to Otigba market while the corporate and high-end services business remained in Victoria Island. He also decided to do more wholesale hardware business than retail while he focused on value-added services.
I only learned from Charles after the fact. I had made the mistake of not separating support services transparently from hardware sales, and we ended up providing services free to a client for seven years. It was one of the reasons our company failed in 2000; our pricing strategy was flawed. Instead of seeing services as a valuable addition, we saw it as an obligation. We also did not learn how to differentiate ourselves and focus on market niches or segments. I see young African tech founders and companies making the same mistake all over to this day.
Do local technology products and services cost too much?
There are typically two answers to the question above. Your right guess is that the technology people will say “No, we don’t charge too much” and on the other side, the clients will complain that the charges are exorbitant for the standard of services and products that they receive. Both positions are right.
Pricing is more straightforward for physical hardware products where the cost of sales is known but very hard for intangible services and software where the price is usually “value-based”. Value-based pricing problems compound in markets where there are little standards, and there is an unfair or uneven basis for comparison with alternatives. It is, still, however, possible. I finally cracked it when we became a full services company after we resurrected from failure.
Proximate Value Pricing
We learned how to solve this in our way with “Proximate Value Pricing”. We decided long ago first to set a pricing and quality benchmark which we would never fall below and provide valuable services over and above that benchmark.
Our benchmark was the average cost of the remote Indian software engineer who had caused our failure the first time. We charged more than the Indians, but we made sure we justified that charge. We were local, closer and offered better services. We provided “differentiated value” with proximity and quality. We charged extra for that value. We also decided to choose niches and not work for everybody.
I learned the term “Proximate Value Pricing” from a Bank Marketing Association (BMA) video that I watched many years before. I also learned market differentiation from James Wolfensohn the former President of the World Bank in a video about his career.
The Professor in the BMA video had two pens, a 5 cent cheap Bic ballpoint (Biro) pen and a $40 Cross ballpoint pen. He drew two lines on a piece of paper, passed it around and asked the audience to tell which line was drawn by the Cross and which line was drawn by the Bic? The audience could not know the difference between the two.
The professor then told the class that both lines were actually identical, but the Bic pen cost only 5 cents while the Cross pen was sold for $40. The difference between the two companies at that time was that BiC, which had the cheaper mass produced pen and with extensive global distribution was making losses and spinning off divisions. AT Cross, the American company manufacturing the cross pen had returned consistent profits and regularly grown since inception.
The lesson was that while both pens may do the same primary thing, Cross had added more “value” to their pen and reflected that value in the pricing. A Cross pen was a prestigious asset while a Bic ballpoint was a commodity.
He explained that the same thing applied to banking. Commercial banks at that time were bankrupting themselves with competition and low pricing; meanwhile, the investment banks with superior service, price differentiation and profitable customer segments were winning. Similar to local tech today.
Quality has its price, the trick to it is consistency. Inconsistent quality is the problem with most of the local technology services and products. It is why proper pricing is complicated.