By Dan Boudreau

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 will likely employ all three methods: pricing to market, pricing to cost and break-even pricing.

Present Your Prices and Pricing Strategy

1. Pricing To Market

Pricing to market means setting your prices according 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.

2. 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 determine your cost of goods sold, identify the industry standard mark-up for the product or service, then add the two together to create your price.

3. 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 you 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 to break-even or 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 can the customer afford to pay for your product or service?
• 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

Most likely your first concern will be to determine whether your product or service can live in the market place. 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 and are starting your business for purely altruistic reasons, your first priority should be to ensure the numbers work. Beyond the first priority of establishing viability, there are a number other concerns that enable you to chart your course with regard to setting pricing objectives. Here are a few considerations to help you get started.

1. What are your desired timelines to become established in the market?

2. Do you wish to sell more products or services for lower profits or fewer products or services for higher profits?

3. Will you initiate price wars by selling at prices lower than your competitors?

4. Do you have the resources to survive a prolonged price war or do your competitors have deeper pockets?

5. Do you have control over or flexibility with your product and service costs?

6. Do you have control over or flexibility with your prices to customers?

7. Are there existing industry standard mark-up percentages you must adhere to?

8. What levels of the distribution will you occupy and which will you target as customers?

9. What image will your price create with your customers?

This article is Step 44 of the Business Planner’s RoadMap in Chapter 5 of Business Plan or BUST!

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“Dan Boudreau is President and CEO of Macrolink Action Plans Inc. and the RiskBuster Business Plan Oasis at http://www.riskbuster.com Writing your own business plan can be easy, fast and fun! Instantly download a free copy of Dan’s popular fast-track business plan template, The Shell, when you subscribe to the RiskBuster Business Plan Insider at http://www.riskbuster.com”

 

 

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