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Some six years ago, something happened that altered a product preference which had become an unquestionable buy for my family. Over the radio, a jingle played that raced me back to my childhood days and, involuntarily, I joined in singing the advert rhyme of this product and it ached my mind that I had abandoned this detergent product which I knew from the cradle for newer ones. At that moment, it seemed to me that I had been unfaithful. Unfaithful to my first love, as it were! That same day I made up my mind to go back to buying that product. A little resistance to the new stock was easily abandoned when I explained that the detergent is even better than the ones being used by the family. Claim confirmed and product adopted!
Emotions, sympathy, empathy and such feelings play an important role in the choices we make! Shrewdness is also in the passion to come tops in any given business relation. Advertisers use such emotions to convert unwilling buyers. It is not always bad that emotions determine our decisions. Some would say, ‘use your head’ instead but it all amounts to the same thing. This article is not about the neurology of decision-making. Though, Martin Lindstrom’s buy.ology; Truth and Lies About Why We Buy, will be useful for understanding the mechanics of branding and choices.
It happens so often that we encounter people who boastfully thump chests that they have made a good deal. In spite of the initial self-praise of having made a good deal, it turns out that it was a bad deal, in any case. The main culprit in the most soured deal is self-interest, emotions and the emotive force will always be there.
As a background, let me borrow the well-known reasons why businesses fail. Available and uncontroverted statistics state that 18.4% of private sector businesses fail at startup (year one). In five years, 49.7% of those that survived, falter. Exponentially, 65.5% of businesses have failed in 10 years. After 10 years, an entity has become strong to be seen as successful. However, not all in all cases – well-known and strong companies have failed and collapsed at the height of their glory.
Besides all these theories, one major factor why business deals fail is the non-disclosure of actual intent within the disclosed interest. Behind the façade of mutuality and displayed honesty lies deceit, self-interest and the desire to take advantage of the other. The meanness contained in this behaviour by parties to a contract or business relationship is not apparent at the beginning but gradually comes to the fore at the maturity of one or two deals. Oh! “We had a gentlemen’s agreement.” This is often the retort when things go wrong or awry.
The ‘gentleman agreement’ no longer exists, if there was anything like it before. The business contract should be entered into dispassionately with the clear intention to achieve a balance for all parties in the context of actual terms. Any negation of the principle of balance, and fairness to all parties will make a good deal go bad. The consequence is those good relationships existing before a business deal was enacted get ruptured. The root cause is greed, cunning and avarice or the “love of gain’ that overshadows everything. The foregoing are the invisible remote and immediate causes of ‘bad businesses’.
On the modular level, notwithstanding business type and product or service, the success of the business is dependent on appropriate pricing.
Pricing
Pricing, as the final component of the service or product, is determined by production, replacement, and logistics costs. There are also storage, marketing and operations (also called running) costs. Probably the unwritten cost that is usually not determined ahead and not in the books, is competition cost. Competition cost refers to the cost at which a business sells its product, forced to do so by prices of similar goods or prices, even at a loss. This is the price that is induced by market forces, especially from the competition. If any of these components is not taken into consideration before the price is fixed, the business will suffer and for most startups, this is the point where failure is all too glaring. Popular parlance refers to it as the force of demand and supply.
The price at which a product is sold is not always profitable at a unit cost but by volume. In any case, competition price is set by market leaders whose cost of production and scale is not the same as those of mid-level players and smaller ones. Scale determines who is winning the market and those struggling to remain afloat. When shopping around and comparing prices, one thing to bear in mind is that cost of production is not the same for similar companies in the same market.
In insurance, for instance, the rate or price you may finally pay for your policy is the price of shopping or possibly, the market leaders’ price. You have shopped around and found out that market leaders are offering you 1.5% on your comprehensive motor insurance, you thereby insist that if a middle or lower-level company wants the business, they must accept that rate determined by size, scale and volume of the market leader. Typically, Nigeria’s insurance market is a buyer market because the price of products is essentially determined by the buyer. And every insurance company, whether big or small needs volume. Thus, whether corporate or individual, public or private sector, it is the same; the price is determined by buyer preferences and finally set by market leaders. Everybody wants to pay lower prices. This is where both buyer and seller get it wrong and marks the point where that good deal, may jinx up a budding relationship.
Match up and Claims
The matchup is like “the take-it-or-leave-it” price at which an insurance buyer is willing to pay for cover irrespective of the health of the insurer. At this matchup price, the mid or lower-level insurer needs volume and the premium to remain in business and is willing to give cover. But here is the danger: lower limits per occurrence, excess buyback and a few other things might be missing and thus making you vulnerable to certain exclusions that would disadvantage you at the point of claims. Essentially, when a matchup price is accepted by the seller of a good or service, it is inherently a giveaway and not an economic price. As such, your claims during a loss may suffer.
Furthermore, in a highly volatile and unstable economic environment like Nigeria’s, it is important to have an expert who can explain and factor in replacement costs to your asset before determining the appropriate insured value. Property and casualty insurance is annually renewable. In this case, to build a replacement cost and enhance limits per occurrence, a higher insured value may be preferred taking into consideration inflation, foreign exchange forecast and fiscal changes that may happen within 12 months period. In a cutthroat competition environment such as we have in Nigeria, incentives and relationships may be deployed in marketing to get the customer to settle the deal. Incentives may not only be a lower price but an assurance that the service or product promise is kept. This is where relationship plays an important role, thus extending the incentivizing mechanism.
With the dynamics of product differentiation and digital insurance, flexible packages are being churned out to address specific needs. It is important that the consumer defines his needs and read the document to ensure the needs are met and the expectations would not be out of scope.
That deal you celebrated by paying your own predetermined price may hit below the belt when a claim arises. Your policy would have been structured in a way that certain exclusions are worded that take out protections which would make it economically suicidal for the insurer if covered at the rate you paid. The final offer may then no longer cover the existing cost of replacement for the loss incurred.
Don’t blame the insurer alone! Or the product manufacturer. The manual or service charter is always provided. Blame yourself, the consumer, also for lack of consideration in the survival of the entity that manufactures or sells the products. The love of gain is that unspoken, undisclosed item that crushes most contracts, partnerships and all relationships.