Business School - If You Cannot Price It, You Do Not Have a Business

Start here if you are busy — and still not sure the work pays.

The most expensive habit in some African startups is continuing selling hard at a price that does not survive when reflected against  the real cost of doing the work. Founders watch the top line. They count vans leaving the yard. They count WhatsApp orders. The week feels full. Then payday arrives, the supplier wants a deposit, and the account that looked loyal is sitting on 52 days. Volume is not a business. Contribution is what makes or breaks a business.

Pricing is treated as a once-off argument with a customer. It is not. It is the decision that tells you which work is allowed to stay in the building. If you cannot walk a product from the number on the quote to the number left after bargaining, inputs, delivery, delay and breakage, you are running a busy stall with a company name on the door.

This lesson is the first of twelve Tuesday Operator Lessons. This lesson is set out to deliver on one thing: That is to make the price honest and deliver a profit. Next Tuesday we look at how to collect it. Do not skip the honesty and simply hope collections will save a line that was never priced to live.

A worked example: two lines, one firm

Call the firm CleanLine. It is a composite, built from the pattern we see across packaging, chemicals, food and light manufacturing from Germiston to Ottery. CleanLine packs a workshop degreaser in Gauteng. Two lines look healthy in the sales book. Only one is.

Line A — the 5-litre drum the workshops actually reorder

List price is 189.00 Almost nobody pays list. The average invoice last month was 165.00 That is the only selling price that matters.

Now load the cost the sales book never shows:

Line A still pays. Not as well as the list price promised, but it pays. A founder who only watches the 189.00 number will think they have a 62% gross margin. They do not. They have about 68.00 to put toward rent, wages, tax and the next drum purchase. That is the number that decides whether the line is allowed to live.

Line B — the 1-litre ‘value’ bottle that keeps the packing line busy

This is the line everyone likes because it moves. Spaza and hardware counters take it on consignment. The ticket on the shelf is 49.00. After the retailer’s cut, CleanLine nets 32.00 Cost of goods is 22.00. Delivery into a scattered small-store book is 8.00 a unit if you are honest about petrol and time. Returns and unsold stock come back smelling of paraffin and come off the next invoice at another 5.00.

Contribution: 32 − 22 − 8 − 5 = −3. Every unit that leaves the yard takes three rand out of the business. The packing line is busy. The WhatsApp group is busy. The firm is poorer.

That is the lesson hiding inside many African sales books. Activity is not evidence. Contribution is evidence.

Three pricing realities this market will not negotiate away

1. Customers bargain. Your average price is the price.

List price is a wish. The invoice is the business. If four workshops pay R165 and one chain buyer talks you to R129 ‘for the volume’, you no longer have one product. You have two, and the second one is quietly teaching the first one that the number is flexible. Write the last 30 days of actual invoices. Use that average, not the poster on the wall.

2. Inputs move with the rand and the diesel pump.

In CleanLine’s 5-litre drum, roughly 40% of the concentrate is imported. A 10% slide in the rand does not wait for your next price list. It is about R3 extra in the drum before you have touched labour. Diesel does the same to the bakkie. Firms that reprint a price list once a year are donating the year’s inflation to the customer. When the input moves more than 8–10% and stays there, the price has to move. Not the speech. The price.

3. Selling across income bands is not the same as running two brands.

The workshop that pays R165 and the buyer who wants a R129 ‘community pack’ are not one customer with two moods. They are two jobs. If you use the cheap pack to win the expensive customer, you have trained the expensive customer to wait you out. If you need a lower rung, build it as a different pack, a different channel, a different promise — and a different cost sheet. Do not let the cheap version set the price of the version that feeds the firm.

Kill, keep or raise

Once the number is honest, the decision is smaller than founders make it.

Kill it if contribution is negative after honest costs, and you cannot raise the price or cut the cost inside 30 days. Killing a line is not a funeral. It is how you stop funding a hobby from the line that works. Stop packing Line B. Tell the stores why. Offer Line A or nothing.

Keep it if contribution is clearly positive and the line either funds overhead or opens a door you can name. Keep Line A. Cap the discount. Write the floor on the quote template so a salesperson cannot give away R68 of contribution to ‘close the month’.

Raise it if you have not moved price in twelve months while inputs have; if you are the reliable supplier in a market of no-shows; or if your best customers already pay more than your worst. Raise the worst customers first. If they leave, you have learned they were never paying for the business — they were renting it.

A useful rule of thumb: if a single account is taking your price below the floor so you can ‘keep the volume’, you do not have a customer. You have a concentration problem. That is a later lesson in this term. This week, protect the floor.

Five steps you can run this week

1. Pick your top three lines by last month’s invoiced value

Not by how much you like them. Not by how often they are mentioned in the WhatsApp group. By money that left a customer account and arrived in yours.

2. Replace list price with average invoice price

Add the last 20 invoices for each line. Divide. That number is your selling price. If you do not have 20 invoices, you do not have a line yet. You have a test.

3. Fully load the cost

Goods. Packing. Delivery. The cost of waiting to be paid (annual interest on the delayed cash, even if the interest is what you could have done with the money). Breakage and coming-backs. If a cost is ‘small’, put it in anyway. Small costs are how Line B stays in the catalogue.

4. Separate the customers who pay the price from the customers who take the margin

One column: average price paid. One column: days to pay. The account that pays R165 in 14 days and the account that pays R140 in 60 days are not the same customer at different sizes. They are different work.

5. Write kill / keep / raise against each line, then put a date on it

A decision without a date is a feeling. Line B is killed from next Monday. Line A’s floor is R158 from the next quote. The chain buyer on R129 is given two weeks to come up or come off the book. Put it on one page. Tell the people who quote.

The one-hour pricing audit

Do this on a Tuesday morning before the phones get loud. Phone off. Spreadsheet open. No committee.

Under the table, write three more numbers you will watch for the next four weeks: contribution per unit on each line, the share of volume sold below your floor, and average days to get paid. If those three do not improve, the audit was a ceremony. Ceremonies do not pay suppliers.

What to measure next month

•   Contribution per unit on the top three lines — same method as the table, every Friday.

•   Share of volume invoiced below the floor you wrote down this week.

•   Average days to pay on those three lines. Price that is collected in 60 days is not the same price as cash in 14.

If you want a single target for October: no more than 10% of volume on a kept line sold below the floor, and Line-B-style negatives gone from the packing list.

The mistake that looks like progress

Raising volume to cover a bad price. Taking the chain’s R129 because ‘we need the throughput’. Adding a fourth pack size so nobody has to hear no. Discounting at month-end so the sales board goes green. All of that feels like building. It is how CleanLine funds Line B with Line A until Line A is tired and the bakkie is still full.

A full yard is not a strategy. A line that leaves money in the business after the bakkie comes home — that is a strategy. Price is how you choose it.

If you only do one thing

Tonight, take last month’s top line by invoice value. Replace the list price with the average you actually received. Subtract goods, delivery, the cost of waiting, and your product returns. Write the number that is left. That number is the business. Everything else is a story you tell yourself in the bakkie.