The Impact of Overpricing on Zimbabwean Businesses

In Zimbabwe, there is a recurring tendency for businesses and individuals to adopt an overpricing strategy, colloquially referred to as “creaming.” This practice involves setting prices at excessively high-profit margins, often exceeding 20%, even when acting merely as intermediaries in transactions. While this approach might generate short-term gains, its medium to long-term consequences could be far more detrimental to business growth, customer retention, and the overall economic ecosystem.

Understanding Overpricing and Its Drivers

Overpricing is often driven by various factors unique to Zimbabwe’s economic environment. These include:

• Hyperinflation and Currency Volatility: Businesses aim to hedge against rapid devaluation by inflating prices.
• Perceived Scarcity: Entrepreneurs capitalize on the perception of limited supply to justify high margins.
• Short-Term Survival Mindset: Many businesses prioritize immediate cash flow over sustainable growth.
• Middleman Culture: A significant portion of transactions involves multiple intermediaries, each seeking their share of profit.

While these factors may seem justified in a volatile economy, they inadvertently create a culture where pricing often feels exploitative, leading to significant repercussions.

The Effect on Business Relationships

Pricing is a fundamental aspect of trust in any business relationship. When businesses overprice, especially for homogenous products, they risk eroding the trust and goodwill of their customers and partners. Some specific effects include:

1. Reduced Customer Loyalty: Customers exposed to overpriced goods or services often feel exploited. As they become more aware of competitive alternatives, they are likely to switch to other providers offering fairer prices.
2. Weakened Partnerships: In B2B interactions, overpricing can strain relationships with suppliers and distributors. Partners who feel they are being overcharged may seek alternative collaborations, potentially cutting off lucrative opportunities.
3. Perception of Greed: Excessive margins can give businesses a reputation for prioritizing profit over value creation, making it difficult to foster long-term relationships.

The Impact on Customer Retention

Customer retention is a cornerstone of sustainable business. However, overpricing tends to push customers away for several reasons:

• Price Sensitivity: As customers are exposed to more transparent pricing through digital platforms and informal markets, they develop a sharper sense of what constitutes fair pricing. Overpriced products are often the first to be abandoned.
• Homogeneity of Products: In sectors where products are largely indistinguishable (e.g., fuel, basic groceries, or services), customers will naturally gravitate toward more affordable options. Overpricing in such scenarios becomes unsustainable.
• Competition from Global Markets: E-commerce platforms and cross-border shopping expose customers to global pricing trends, making them less tolerant of local overpricing.

Pricing Variations and Market Disruption

Another critical issue arises when pricing for the same product varies widely across different sellers. For instance, a basic smartphone accessory could cost $5 in one shop and $15 in another. Such inconsistencies confuse consumers and diminish confidence in local businesses. Moreover, they create a perception of chaos within the market, further driving customers to seek consistency elsewhere.

The Broader Economic Consequences

Overpricing at scale not only harms individual businesses but also affects the broader economy. Some long-term consequences include:

1. Stunted Growth: Businesses overly focused on extracting high margins often fail to reinvest in innovation, customer experience, or operational efficiency, limiting their potential for growth.
2. Reduced Market Participation: When goods and services become unaffordable, large segments of the population are excluded from the market, reducing overall demand.
3. Informal Market Growth: Overpricing in the formal sector often drives customers to the informal market, where products are cheaper but may lack quality assurance.

A More Sustainable Approach

To counteract the negative effects of overpricing, Zimbabwean businesses need to adopt more customer-centric pricing strategies. Some recommendations include:

1. Value-Based Pricing: Instead of focusing solely on margins, businesses should price products based on the value they provide to customers. This approach fosters trust and loyalty.
2. Market Research: Regularly studying competitors and understanding customer expectations can help businesses set competitive and fair prices.
3. Focus on Volume Over Margins: Lower prices can attract more customers, leading to increased sales volumes and potentially higher overall profits. This approach is particularly effective in price-sensitive markets.
4. Transparency: Clearly communicating how prices are determined can build trust with customers. For instance, explaining that a portion of the price covers currency risks or operational costs helps customers understand the rationale behind pricing.
5. Efficient Operations: Businesses should strive to reduce operational inefficiencies and cut unnecessary costs instead of passing them on to customers through higher prices.

Conclusion

While overpricing and creaming may seem like viable strategies in Zimbabwe’s challenging economic environment, their medium to long-term effects can be detrimental. By prioritizing short-term gains, businesses risk damaging relationships, losing customers, and stifling growth. A shift toward more sustainable pricing strategies—rooted in fairness, transparency, and customer-centricity—can help businesses thrive in the long run while contributing to a healthier and more equitable market.