As the shilling’s depreciation raises import costs, businesses face a difficult choice between protecting profit margins and keeping products affordable. Accepting lower returns may retain customers, but only if higher sales can compensate for the sacrifice.
“Some businesses may have to reduce their margins to keep their products affordable and retain customers.”
That was Dr Adam Mugume, the Bank of Uganda’s Executive Director of Research, responding to concerns from an importer whose profits had been battered by the shilling’s depreciation. The rising cost of foreign currency had increased the importer’s liabilities, squeezed profit margins and disrupted future business plans.
Mugume’s observation points to a dilemma facing businesses when costs rise: protect the profit earned on each sale, or protect the customers whose purchases keep the business going? Raising prices may preserve margins but drive customers away. Absorbing some of the increase may keep products affordable, but leave the business earning less. Under the right conditions, that sacrifice could even help a business grow.
For a business owner, raising prices may seem the obvious response to more expensive imports. Yet customers facing their own financial pressures may buy less, postpone purchases or switch to cheaper alternatives. Absorbing part of the increase could help a business retain those customers, particularly in a market where competitors are fighting for the same buyers.
The strategy, however, depends on the numbers.
Suppose a trader earns Shs10,000 in gross profit per item and sells 100 items a week, generating Shs1 million before operating expenses. If the gross profit per item falls to Shs8,000, the trader must sell 125 items to generate the same gross profit. That is a 25 per cent increase in sales volume just to match the previous return.
If sales do not rise enough, the business earns less. If they rise sufficiently, accepting a smaller margin could pay off.
The potential benefit goes beyond immediate sales. Competitive prices may help a business retain customers, attract new ones and increase its market share. Higher sales volumes could also improve its bargaining power with suppliers or spread fixed costs across more transactions. Over time, these advantages may strengthen its competitive position.
But lower prices are not a growth strategy in themselves. A business that absorbs too much of an increase in import costs may struggle to replenish stock, pay workers or meet other expenses. And if customers are already cutting back, cheaper prices may not generate enough additional demand to make up for the reduced margin. Customers attracted mainly by price may also leave when a competitor offers a better deal.
The decision, therefore, is not simply whether to raise prices or keep them down. It is whether the business can absorb part of the cost increase without undermining its financial position—and whether doing so is likely to preserve enough sales to justify the sacrifice. For some businesses, a price increase may be unavoidable; for others, sharing the burden with customers may be the more sustainable option.
Mugume also noted that tighter monetary policy can make investment in Uganda more attractive by improving returns relative to alternatives abroad, potentially supporting capital inflows. That is a separate mechanism from the pricing decisions individual firms make, but both form part of the adjustments taking place as the economy responds to external pressures.
For businesses, the immediate challenge is to remain affordable without eroding their ability to operate. For policymakers, it is to contain inflation while safeguarding longer-term growth ambitions. Rising import costs complicate both objectives.
Ultimately, protecting the profit earned on every sale is not always the same as protecting the business. Accepting a smaller return today may help preserve customer relationships and strengthen a business over time. But it can also leave a business selling more while earning too little to survive.
The difference lies in whether the sacrifice produces a measurable benefit.
As Ugandan businesses navigate rising import costs and uncertain market conditions, the question is not simply whether they should reduce prices. It is whether they can afford to do so, what they stand to gain and how long they can sustain the decision.
Selling for less may help a business win customers. The real test is whether it can turn those customers into sustainable growth.