Part 2: The Marketing Plan – Pricing Strategy

Pricing Strategy
The pricing strategy portion of your marketing plan requires you to determine a price for your product or service. The set price that you charge has to be able to compete with your competitors but also allow you to make a reasonable profit with each sale.

The keyword here is ‘reasonable’, because you can charge any price you feel like, but for every product or service there’s a limit to how much the customer is willing to pay. When you are thinking about how much you want to sell your product or service for, you need to take this consumer threshold into account.

The most common question is always asking “How do I know what price to charge?”. You can figure out the price you charge through calculating your costs, estimating the benefits to consumers, and comparing your products, services, and prices to other competitors who are similar. Set your price by seeing how much it costs you to produce the product or service and add a fair price for the benefits that the consumer will like and enjoy.

You should do some research and find out what your competitors are charging for similar products or services; this will guide you to figure out what a ‘fair’ price for such benefits would be. It may be helpful to conduct a breakeven analysis. Every product anyone creates has ‘fixed’ costs which are costs that must be paid whether or not any units are produced. The breakeven formula is: Fixed Costs divided by (Revenue per unit - Variable costs per unit).

Fixed costs are costs that don’t change such as acquiring a rent, building, and utilities. So let’s say it costs $50,000 to product 100,000 units a year. Your variable costs are $2.00 for materials, $6.00 for labor, and $1.00 for overhead; for a total of $9.00. You decide to sell your product for $12.00. Thus the formula would look like: $50,000 / ($12-$9) = 16,667. In the end you would have to sell 16,667 units at $12.00 a piece to break even.

The pricing strategy that you outline in your marketing plan will answer these questions:

What is the cost of your product or service?
In this section make sure you include all your fixed and variable costs when you’re are calculating this; the cost of labor, materials, freight costs, administrative costs, and selling costs are just a few examples.

How does your price compare to the market price of similar products or services?
Explain how your price is competitive with your competitors. So if you charge a lower price than all your competitors, explain how and why you are able to do this. If it is a higher price, explain why the customer would want to pay more. This is where the strategy part of the pricing strategy comes into play. Will your business be more competitive if you charge more, less, or the same as your competitors and why?

What kind of ROI (Return on Investment) are you expecting with your pricing strategy, and in what kind of time frame?

This will end our discussion on creating the marketing section (Pricing Strategy) of the business plan, but stay tuned as this was only (part 2 of 4). Tomorrow we will be discussing how to create a sales and distribution plan.

Part 1: The Marketing Plan Section of the Business Plan
Part 2: The Marketing Plan - Pricing Strategy
Part 3: The Marketing Plan - Sales and Distribution
Part 4: The Marketing Plan - Advertising and Promotion

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