Present Prices and Pricing Strategy
Set prices for your products and services. In order to set prices you must first be clear about costs.
There are at least three ways to set your prices. To establish prices for your products and services, you might employ all three methods: pricing to market, pricing to cost, and break-even pricing.
Pricing to Market
Pricing to market means setting your prices according to the competitive market prices. Using this method will restrict you to finding your profit through efficiencies and savings on your costs. Some types of business will compel you to set your prices to market.
Pricing to Cost
Pricing to cost means determining your cost to make your product or service, adding on your desired profit margin, and adding the two amounts together in order to arrive at your price. Another way to state this is to determine your cost of goods sold, identify the Industry standard mark-up for the product or service, and then add the two together to create your price.
Break-Even Pricing
Break-even pricing means determining how much you need for your business to break-even overall and then setting your product and service prices to break even and earn a profit.
Things to Consider when Setting Prices
- How price sensitive are your customers?
- Do your customers decide to buy based on price or on other characteristics such as quality, location, or convenience?
- What is the cost of producing your products or services?
- What are your competitors’ prices for similar products or services?
- How many units do you have to sell in order to break-even or earn a profit?
- What are the Industry standard mark-ups or margins for your product or service?
- What discount rates will you offer for bulk purchases?
- How much will your customer pay for your product or service?
- What is the relationship of supply to demand?
- What are the consumer buying trends?
- What is your level of risk?
- What is your desired profit margin?
- What are your personal and corporate financial goals?
Establishing Your Pricing Strategy
Your first concern will be to determine whether your product or service can live in the marketplace. In other words, can you hope to sell it for enough to pay your bills, survive, and earn a small profit? Unless you are already financially independent, one of your top priorities should be to ensure that the business can earn a profit.
Beyond the first priority of establishing viability, a number of other concerns enable you to chart your course in regard to setting pricing objectives. The list on the following page provides a few pricing considerations to help you get started.
- What are your desired timelines to become established in the market?
- Do you wish to sell more products or services for lower profits or fewer products or services for higher profits?
- Will you initiate price wars by selling at prices lower than your competitors?
- Do you have the resources to survive a prolonged price war, or do your competitors have deeper pockets?
- Do you have control over or flexibility with your product and service costs?
- Do you have control over or flexibility with your prices to customers?
- Are there existing Industry standard markup percentages you must adhere to?
- What levels of the distribution will you occupy? Will you be a manufacturer, a wholesaler, a distributor, or a retailer?
- What image will your price create with your customers?
View the Example: Pricing Strategy
Action
If you have set up a working copy of your business plan using the Shell™, this information will be entered under section 3 “Marketing” under the heading 3.9 “Pricing Strategy”
Download the Pricing Worksheet.
If you set up folders in Step 4, we suggest creating a subfolder in the “Business Plan” folder, called “Worksheets” and saving the above “Pricing” worksheet with the file name pricing_year_month_day
To complete this Element you will need to complete your analysis of competitor prices from Step 39 gather all information related to your costs and then:
- Familiarize yourself with the three methods of pricing, including pricing to market, pricing to costs, and break-even pricing. Take all three methods into consideration in order to determine where to position your product or service.
- You can begin the process by setting your prices to market, but it is important to understand that you must confirm viability by completing the Financial Section and comparing the other two methods: pricing to your costs and pricing to your break-even. You can only truly determine whether or not your pricing strategy works by completing your financial projections; then you will be able to see the overall impact on the bottom line in your projected income statement.
- Using the information gathered for your competitive analysis, develop a table to compare the competitor’s prices.
- Create a bottom-up or cost-based price for each product or service. You can use the Worksheet following this list or the pricing Worksheet in the Biz4Caster™.
- Write a summary of your pricing strategy in this Element and include relevant detail in the Appendices.
- Use pricing notes to clarify any potentially confusing points for your reader. Make notes of any assumptions or key information on which you have based your estimates.