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close this bookFinancial Management of a Small Handicraft Business (Oxfam, 1988, 43 p.)
close this folderII. Pricing
View the document(introduction...)
View the documentII. 1. Value in the market
View the documentII.2. Costs and pricing
View the documentII.3. Contribution analysis

II. 1. Value in the market

(i) Market knowledge

Value is related to cost, in so far as different production units in the same locality producing the same item will have similar costs, and sell the product at similar prices. Hence the market accepts that a particular product will be sold within a certain price range. Where selling overseas, the producer might well experience competition from handicrafts which are being produced in other countries at lower cost; this is a fundamental problem with exporting.

Value is also related very closely to utility, and in this respect handicrafts find themselves in competition with non-handicraft items. The introduction of machines, and synthetic fibres, have brought down production costs world wide, although the process has been balanced by much higher wages rates in industrialized economies. Thus handicrafts are caught in a dilemma: their own production costs are rising all the time, yet machine-made products serving a similar purpose are decreasing their value.

This trend is not reversible, so that in the long term market forces will reduce the scale of the handicrafts industry to well below what it is now. The immediate concern, though, is to maximize earning opportunities in the industry as it is at present. The point to consider is not the negative one about long-term trends, but the relevance of market forces in price determination. This is why it is useful to pause to consider the factors other than cost which determine price.

In order to analyze these effectively, it is absolutely necessary to refer to the market in which the product is being offered for sale. Two things need to be known:

· what level of acceptability will the products have in that market? Do people there want this type of item?

· which other products in competition with them are available in that market?

From answers to these can begin an understanding of the value of the products in the target market, and hence the price they will attract. It is quite normal that the same product will have a different value in different markets. For example, a heavily decorated woven basket produced only in one rural locality might fetch a low price in the local market because it is perceived only as a utility item, and many other similarly useful baskets are available. In the capital city, or overseas, it might be appreciated as an unusual and beautiful product, and accorded a high value for its decorative aspect. By contrast, many products may not be saleable outside of the production locality because other areas have access to similar products, or products performing the same function, at a lower price.

(ii) Increasing the value

Utility to the consumer, and competition from other products, are not the only factors influencing the market's perception of value. It is encouraging to note that while competition pushes prices down, other factors can push them up. Essentially, these can well be summed up under the heading presentation, and include labelling,packaging, display and promotion.

Production units should always look for opportunities to increase the value of their products. Often a small additional cost—an attractively printed label, eyecatching packaging—can increase value by a greater amount than the cost. Overseas markets are particularly responsive to packaging. There are examples of products sold in Europe and America—such as cosmetics—where the packaging increases the value by many more times than its cost. Handicrafts producers can take advantage of this fact. For example, packaging spices or soap in small baskets, themselves costing very little, might immediately give the product acceptability in the gift market, as opposed to the self-purchase utility market, and thereby increase its value significantly.

Attractive display of products—in a bazaar, a shop, or a sales catalogue—can increase a product's value. Generally, the more sophisticated the market into which a business is selling, the more scope there might be for increasing value through presentation. Metropolitan consumers will have less knowledge than local ones about production costs, and more interest in how a product looks in its place of sale.

(iii) The artisan's income

One of the major difficulties faced by artisans the world over is lack of access to a market. The reality of their life is not how to turn market characteristics to their advantage, but how to survive on a hand to mouth basis. Lacking capital and knowledge about how to sell their products, they are often exploited by the local trader because of their desperate need for cash.

Organization of social production units can make a significant impact on an individual artisan's life. Aside from the important social benefits obtainable through participation in an income-generation activity, the artisan might derive vital financial advantages:

· access to credit at fair rates, or supplies of raw material of which the cost is offset against the remuneration for production, offer an alternative to a bank loan or to the money lender, at high rates of interest

· the possibility of regular work can remove the need to take a day off each week to sell what has been produced in the local market

· instead of depending on the local trader, the artisan can move one step forward in the distribution chain, selling through the unit to perhaps the same customer as the trader. The profit margin saved by removing a link from the distribution chain should to some extent be translated into higher prices for the artisan.

The unit cannot obtain higher prices than the value accorded to the products by the market in which it sells. For the artisans, though, this would represent a new market opportunity, through which the products would gain for them an increased value.