Being an entrepreneur rules…but there are rules!
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 success. 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 happy bottom line — pricing your product or service to help ensure profitability.
A well-conceived pricing strategy is based on a combination of factors that consider cost, demand, and competition. Having the hard data on cost is essential, but cost alone is insufficient for establishing profitability. A clear picture of profitability can emerge only by relating cost with demand at various price levels, and understanding how the competitive environment works to set some limits.
However, estimating demand requires more sophistication than simply striving to have the lowest price in the marketplace. It requires 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, the key to proper pricing is 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, will help determine realistic price levels. Although formal market research can be helpful, you can 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 Success
While proper pricing is the mechanism that can turn an exciting idea for a business into a profitable 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 influencing the creation of a viable pricing strategy.
Irrespective of how your company’s roadmap is drawn, it might be best 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 keep you well positioned for staying ahead of the competition on your road to success.
R. Kenner French, the author, has written two books, speaks all over the country, and lives on an island-Bainbridge Island, WA.