Consumers are questioning whether recent price hikes by companies such as MultiChoice, which owns satellite TV service DStv, are warranted. The sticking point? Should price hikes by companies in an inflationary environment make it to press?

MultiChoice has faced media criticism for repeated price hikes across key markets like Nigeria and Kenya. In Kenya, prices have jumped three times in the past year.

A simpler explanation is that MutiChoice’s decision to raise prises is not a simple case of exploiting its position in a limited market to boost its profits. Rather, it is in response to the harsh realities of the existing economic climate.

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Across many industries, inflation is driving up the cost of production, and MultiChoice is not immune to this. It is facing rising employee costs, fuel prices and currency devaluation in its key markets. These issues all combine to cut its profit margin on subscribers who use its satellite TV service.

So, in this context, the subscription fee jumps are a measure to maintain profitability instead of a cynical attempt to boost profits from lack of business competition. While some argue that MultiChoice could absorb some of the price adjustments or focus on customer affordability over shareholder returns, the hike is more a necessary adjustment to survive in the current economic headwinds.

This is why MultiChoice’s upward revisions reflect a complex economic landscape. While inflation squeezes profit margins, linking all price hikes solely to that wouldn’t be accurate. It is true that companies across the globe are raising prices, but some, like MTN and Airtel Africa have seen profit dips despite price jumps.

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These issues show that there are other factors at play. For instance, it can be argued that large corporations continue to exert their power on less-performing companies. It means that they likely have more control over pricing even in stable inflation times.

Yet, there is some truth to the idea that private companies set prices based on what their consumers are willing to pay. Private businesses perform wide market research to understand their target audience’s spending habits, and price sensitivity. They are able to determine their customers’ ideal spending based on a thorough assessment of their different price points. This is possibly the reason these corporations appear to be “reaping big” from their customers, yet it is their pricing strategy that aligns with customer willingness to pay.

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Focusing on a consumer’s willingness to pay does not paint a complete picture. This is because a company’s success anchors on more than subscription fees. There are other factors like stronger branding and high-quality products or services that can be associated with a company’s financial well-being.

At this point, consumer choice comes into play. Customers or consumers aren’t simply forced to spend based on a company’s pricing strategy. They make conscious decisions about where their money goes, and companies need to justify their prices by offering something truly valuable. This value proposition could come in the form of convenience, status associated with the brand, unique features the product offers, or exceptional customer service.

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In most markets, competitors exist, offering similar products or services. If a company sets excessively high prices, consumers have the power to choose a more budget-friendly alternative. While companies do consider consumer willingness to pay, it’s just one piece of the puzzle in their overall pricing strategy.

The idea is that if the price doesn’t reflect true customer value, the business fails. Until then, what people are willing to pay dictates the market price. This is a natural economic process.

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Kenn Abuya

Senior Reporter, TechCabal

Thank you for reading this far. Feel free to email kenn[at]bigcabal.com, with your thoughts about this edition of NextWave. Or just click reply to share your thoughts and feedback.