Whether you’re planning to start a new business, trying to grow a fledgling business, or working to keep an already established enterprise competitive, your business plan is your “roadmap” toward entrepreneurial confidence. And, since running a business is a little like embarking on a journey without a final destination, it may be necessary to consult, or even reconfigure, your map from time to time.
Some of the assumptions in a business plan are based on “hard” data (e.g., cost quotes for materials, supplies, and various services), while others are based on “soft” data or projections of what you reasonably expect to happen in the future (e.g., sales one year from now). In between the “hard” and the “soft” lies the key to a suitable bottom line—pricing your product or service to help manage profitability.
A comprehensive pricing strategy can be based on a combination of factors that consider cost, demand, and competition. Having the hard data on cost is essential, but cost alone may be insufficient for establishing profitability. A clearer picture of profitability may emerge by relating cost with demand at various price levels, and understanding how the competitive environment works to set some limits.
However, estimating demand might require more sophistication than simply striving to have the lowest price in the marketplace. It may require evaluating the relationship between price and value, and realizing the price that customers are willing to pay is often related to characteristics they perceive as important such as quality, accessibility, and product guarantees. Consequently, one key to appropriate pricing might be having your customers perceive good value for their money.
Knowing how your product or service compares to others in the market, and understanding the demand for such a product or service, can help determine realistic price levels. Although formal market research can be helpful, you can also gather valuable market information by talking with customers and recording their responses. Sometimes this informal database can provide the impetus for revising a particular strategy or changing a course altogether.
Finding Your Road to Confidence
While appropriate pricing is a mechanism that can turn an exciting idea for a business into a dynamic ongoing enterprise, there is no “best way” or “single formula” for establishing the price of a particular product or service. That is, it is possible to create a pricing strategy that is primarily cost-based, demand-based, or competition-based or, more likely, a combination of all three factors. The nature of the industry in which your business operates, as well as the specific product or service you provide are significant factors that can influence the creation of a viable pricing strategy.
Irrespective of how your company’s roadmap is drawn, it might be fitting to view it as a work in progress. Changes in the business climate or rapid change within the business may require a re-examination of various assumptions that went into an earlier pricing model. The critical point is to have your pricing strategy help you manage the competition on your road to success.
This article was prepared by Liberty Publishing, Inc.
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