In my more than 20 years in the UAE, I’ve seen small businesses either thrive or struggle based on their approach to two key concepts: revenue management and pricing.
Revenue management isn’t just about setting a price, crossing your heart, and hoping for the best. You must manage inventory (products or time) and demand as well. Knowing how to adjust what you offer, when, and at what price is crucial.
Business owners often misunderstand these concepts, which proves to be costly. Yet, while most small enterprises lack the luxury of large analytics teams, they can still effectively manage revenue and optimise pricing with a strategic approach.
Let’s explore common pricing models, the errors you can make with each, and how to correct them.
1. One-Size-Fits-All Pricing
Many businesses stick to flat pricing strategies year-round. It might seem convenient but ignoring seasonal demand fluctuations or changes in customer behaviour leaves money on the table. For example, in the UAE, demand fluctuates—holidays like Ramadan, tourist seasons, and major events such as Expo 2020 drive purchasing behaviour.
-> Corrective Action: Make Demand-Based Adjustments. Adjust pricing to capture peaks by offering promotions on select inventory during festive seasons or quieter months. Analyse historical sales data to identify demand patterns and adjust prices accordingly.
2. Cost-Plus Pricing
This method involves adding a markup to your product or service costs. It’s simple but often leads to oversights. Indeed, while cost-plus pricing covers your costs, many owners ignore market conditions, like customers’ willingness to pay in competitive UAE markets like Dubai or Abu Dhabi.
-> Corrective Action: Factor in Market Dynamics. Understand how competitors set their prices and what customers value. For instance, a restaurant in Dubai Marina can charge more based on ambience and location. Adjust prices for the overall experience, not just the cost of inputs.
3. Value-Based Pricing
This approach prices products based on perceived customer value, but there’s a catch—value is subjective and businesses often misinterpret what customers are paying for. A spa might think clients are paying for a massage when they’re actually paying for an overall luxury experience.
-> Corrective Action: Know Your Customer’s Priorities. In the UAE, many customers value luxury and exclusivity. If you own a beauty salon in Downtown Abu Dhabi, charge for the experience and convenience, such as valet parking. This helps command higher prices without customers questioning the cost.
4. Dynamic Pricing
Adjusting prices based on demand, time, or availability is common in larger industries but often underutilised by small businesses that are afraid fluctuating prices may confuse customers and avoid dynamic pricing altogether.
-> Corrective Action: Educate Customers and Embrace Flexibility. Dynamic pricing works when done transparently. Customers already understand variable pricing models, such as Uber’s surge pricing or fluctuating hotel rates. For instance, a café near Saadiyat Beach could raise prices with special menus during holidays and offer discounts during quieter periods.
5. Competitive Pricing
In competitive UAE markets, some small businesses try to undercut competitors. While this can keep them in the race, it often backfires, compromising their margins and leaving them working harder for less.
-> Corrective Action: Differentiate, Don’t Just Discount. Focus on what makes your business unique. A boutique in Yas Mall might not match fast-fashion retailers on price, but it can offer personalised services and unique products. Create bundles or loyalty programmes that highlight the value you deliver, rather than competing solely on price.
Practical Tips for Revenue Management
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Leverage Technology to Track and Forecast Your Numbers Religiously. Many small businesses set prices based on intuition, not data, which can lead to poor decision-making. However, even small enterprises can use modern POS systems to track sales trends. Use this data to make informed pricing decisions and forecast demand.
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Anticipate Costs, Regularly Review, and Adjust Pricing. Rising operational costs, like rent, transport, or import duties, can quickly eat into profits, especially in the UAE. So, review these costs quarterly and adjust pricing if needed. For instance, if shipping costs rise due to supply chain issues, adjust your product prices rather than absorb the loss.
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Embrace Tiered pricing. Where customers are price sensitive, offer a range of prices – basic, medium and premium. This will help acquire customers to try out your product/service while gradually upselling them with the quality and personal touch.
For small enterprises in a dynamic market like the UAE, getting revenue management and pricing right is crucial for success. Avoid common mistakes by being proactive, flexible, data-driven, and in touch with the market constantly, refining your approach over time. When done right, the rewards can be significant.
In the second chapter of this two-part series, we look at how to optimise your financial management from the costs side. Click here to read it.
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