29 November 2012

Rwanda: Why Achieving Price Efficiency Is Important


One of the peculiar things about Kigali is how goods and services are priced. Prices for the same products/services often hugely vary within the same set of circumstances (socio-economic and geographic space). It can be astounding.

Some time back, I needed to bind a document of about 15 pages. I went to the first stationer who told me that I would part with Rwf5, 000. I thought it steep and moved across the road to the next stationer. They charged me Rwf500. That is a tenth of what I would have paid in the first shop.

I went back to the first stationer to confirm if indeed they meant Rwf5, 000. Given our English-French translation problems perhaps the extra zero came from miscommunication, I thought. I wrote down the integers and asked if the shopkeeper had meant Rwf500. She added the extra zero. This is a very telling case of price inefficiency.

Price is presumed to represent the value of an item (not always true). But, as seen from stationer's case above, this depends on all the information that the aggregate of buyers and sellers have on that particular product/service. The clearer the information, the more it will be reflected in the price, thus the more price efficient the market is. The price will reflect the value of the good or service at that particular time.

'Price efficiency' is an economic term that is based on efficient market hypothesis (EMH). EMH has three versions: the week one claims that the prices of publicly-traded assets already reflect all available information, and past prices are of little value in predicting future trends. The semi-strong version of EMH holds that while prices are efficient, they react instantaneously to new information, while the strong version of EMH maintains that asset prices reflect not just public knowledge, but private insider information as well.

That price is important and cannot be gainsaid. We budget (both individually and organizationally) on the basis of the prices of the items we need.

We plan based on anticipated future prices (inflation). This means that it is the single biggest determinant of resource allocation patterns in both micro and macro environments.

Pricing is thus one of the things that we need to bring at the top of our economic growth and development agenda if we wish to be more competitive.

We must from the onset appreciate that Rwanda, being a landlocked, net consumption country starts from a position of weakness. There are just so many overheads to take care of before we receive a service or a product. This, however, cannot justify a shop across the road charging ten times the price for the same product.

The main reasons given for charging higher prices is tax, infrastructure and cost of inputs, among others. Of particular concern would be energy costs. In the last two or three months, for example, electricity prices (cash power) have gone up by over 25 per cent.

This affects pretty much the price of everything across the board. This could lead to a cost push inflation that would reduce our productivity.

However, the biggest culprit that causes price inefficiency is the very reason we start business enterprises; the pursuit of profit. It is also a knee jerk reaction by businesspeople to overcharge as a short cut to profitability. Unless one is selling goods of ostentation, that is a bad strategy. At best, it will only work in the short term.

Typically, businesspeople start off by figuring the profits that they seek, then working backwards to the unit price of their product.

This is a smart way to do things save for two little details; the customer and the market. These must be the starting points in pricing and indeed other activities of the business.

There are four ways to profitability: price, sales, costs and a combination of any or all of the above. To survive, businesses will have to tread these paths innovatively.

The writer is an expert on entrepreneurship.

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