Pricing a packaged food product too low is often mistaken for a competitive strategy. In reality, it is a common path to insolvency for African food SMEs.
Underpricing leads to a cash flow gap where a business grows in sales volume but runs out of working capital to buy raw materials for the next batch.
Overpricing, conversely, results in stagnant inventory and the loss of critical shelf space in supermarkets and kiosks.
Calculate the true cost of production
Most founders calculate cost based only on raw ingredients. This is a mistake that erodes profit margins before the product even leaves the factory.
A complete Cost of Goods Sold (COGS) calculation must include every single input per unit. For a producer of packaged plantain chips, this means accounting for the plantains, cooking oil, and seasoning.
It must also include the cost of the packaging film, the label, and the electricity used for sealing. Labor costs, including the wages of those processing and packing the food, must be divided by the total units produced per shift.
Failure to include these overheads leads to a pricing model that ignores the real cost of operation.
Account for the retail margin
SMEs often confuse the wholesale price with the retail price. The retail price is what the consumer pays, but the SME does not receive this full amount.
Retailers, from large supermarket chains to neighborhood shops, require a margin to cover their own rent, staff, and electricity. Depending on the product and the outlet, this margin typically ranges from 10 percent to 30 percent.
If a product is priced for the consumer at 500 Naira, and the retailer takes a 20 percent margin, the SME receives 400 Naira. If the production cost was 350 Naira, the actual profit is only 50 Naira per unit.
Ignoring this margin during the pricing phase means the business may find its products rejected by distributors who cannot make a profit selling them.
Manage logistics and compliance costs
Getting a product to the shelf involves costs that occur after production. Logistics, including transport to distributors or retail hubs, can significantly impact the final price.
In Nigeria, food SMEs must also account for regulatory compliance. Costs associated with NAFDAC registration and periodic renewals should be amortized across the projected volume of units sold.
Waste and spoilage are also inevitable in food retail. A resilient pricing strategy includes a small percentage for damaged goods or expired products that the retailer may ask the producer to replace.
Avoid these common pricing mistakes
- Pricing based solely on the competitor’s price without knowing the competitor’s cost structure.
- Forgetting to add Value Added Tax (VAT) to the final invoice.
- Applying a flat markup percentage without calculating the absolute Naira value of the margin.
- Changing prices too frequently, which disrupts retailer trust and consumer habits.
These errors lead to a fragile business model where a slight increase in the price of raw materials, such as flour or sugar, turns a profit into a loss.
SME owners should build a detailed pricing spreadsheet that allows them to adjust a single variable, such as the cost of packaging, and see the immediate effect on the net profit per unit.
The immediate action for any food founder is to audit the last three months of production costs to ensure no hidden overheads are being ignored in the current retail price.
