5 Ways to Use Your Marketing Plan to Define Your Business – Pricing

5 Ways to Use Your Marketing Plan to Define Your Business – Pricing

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So far we covered Market, Brand, and Product. Today we’ll talk about how defining your pricing can help you create your business plan.

Tip #4 Define Your Pricing

Pricing is usually a calculation based on the cost of your product or service, the expenses in your business and your future expected income. I say “future” because when you are starting out you will most likely not be able to draw an income from your company, but if you do not plan to draw an income right from the beginning you will not ever get one. So here is an overview of my process to determining the cost of a product or service so that you can plan for an income.

Everything you sell must cover the cost of everything it takes to run your business, so, to start you will need to know the cost to run your business.  Here is a small list of things that you may need to include in this. Do not add in manufacturing costs, we will look at those in a minute.

  • Lease, rent, or mortgage
  • insurance
  • utilities
  • capital costs (for large equipment e.g. manufacturing tools, computer networks, office furniture)
  • memberships
  • office supplies
  • vehicle expenses (gas, repairs)
  • employees, contractors, hired professionals (e.g. bookkeeping, accounting)
  • phones, wireless, internet
  • website and web hosting
  • licenses, contracts, legal work
  • marketing and advertising

Talk to your accountant for a full list. There may be things you did not include and you should so you can get the tax benefits.

Product

If you have a product, pricing may be easier to define, but not always. There is a set cost to manufacture or purchase the product for sale. If you are the  manufacturer and you do not know this cost then you have some work to do. You should know the cost per unit to manufacture (as you would if you were purchasing the product for resale). There are several costs that are associated with the product, such as:

  • product development
  • supply chain costs
  • inventory management
  • manufacturing costs
  • shipping
  • etc.

As you can see, you have a lot of work to do when considering the cost of your product.

Know your market

You cannot just do the calculation and arbitrarily set a price that gives you a 35% margin on your product. As much as you want to make that money quickly you may price yourself out of the market. Now you have to go back to who your target market and competitors are. What are they willing to pay, how are you positioning your product and what are  your competitors charging.

If you are positioning your product as a high-end item, then know what the range of prices is for that product. You can choose to be right at the very top of the high-end, but you had better have a great position on why your product is worth that price.

How much can you sell

So now you know how much it will cost and what the price range is for your products in the market you wish to sell it in. To determine the exact price you need to take into account how much you have to sell and how much you can sell to be able to make a profit. If you top out in your manufacturing process at 100 units per day, but it takes sales of 1000 units per day to pay for your business and make a profit then you are:

  1. not charging enough
  2. not manufacturing enough
  3. not in business to make money

Make sure your price = profit + costs so you can continue to grow and succeed.

Service

If you have a service you may have more room in your pricing model. It is more difficult for customers to shop around for some services and often service is based on expertise. If you are the expert with years of experience then you will demand a higher price. The calculation is the same for service as it is for product (price = profit + cost), but the profit margin can often be defined by you and what you think your market will tolerate, and not what your competitors are charging. This would not be true if you are competing on price, like many automobile service stations have to, but it is true for high-end service centers, like those niche experts that work only on a specific import.

Here are some things to look at in your service to determine if you are going to make money at it.

  • Start by determining what your hour is worth. (even if you don’t plan on charging an hourly rate)
  • Document your entire process so you know exactly what has to be done to fulfill your clients purchase.
  • Determine how much preparation time is required
  • Calculate how much you would have to get paid to get your hourly rate to handle the entire process
  • Calculate how many purchases you would have to have to cover the cost of your business and make a profit

If you do not have enough hours to fulfill the number of purchase required to run the business then:

  1. you need more employees
  2. you need to leverage your time better

So Now What

So now that you know the cost of your product or service and what you are going to charge, how does this affect your business plan? Well, by defining all the costs involved in selling your product you just defined all aspects of the operation of your business. You know who is working for you, how you will manufacture a product, what hours are required to run you service successfully, etc.. The costs outline all aspects of your business, and knowing this will make writing your business plan much faster and easier.

22 Comments

  • Hello,
    Does anyone know around how much it should cost for a small business website (very simple who we are kind of website plus ecommerce using paypal) please?

    I’ve browsed dozens of web designers with prices from around $700 up to several thousands (eeek!).

    Surely it shouldn’t cost too much for a fairly simple site – I’m not trying to be the next Amazon or something!

    Thanks,
    Jilly

  • Thank you for for this great post. I’m always on the look out for content and was lucky to find you on Google I will surely be back againg to see what other great content you post.

  • I been wanting to let you know, you are spot on. I got to your website from some other site and am heavily interested in this niche and learning this. Do you mind if I link to this website from my site?

  • Hi, sorry for enquiring this request here, but I can’t find a contact form or something so I felt like I leave my query here. I run a blogengine blog but I am getting increased amounts of spam. I see u use wordpress, is it straightforward to regulate spam with wordpress or doesn’t it make any difference? I hope you will respond to my comment or maybe send me an email with your answer if you don’t want to approve the comment. Best regards, Annie

  • This fantatic post was very nicely written, and it also contains many good facts. I appreciated your professional way of writing the post. You have made it easy for me to understand. Good and precise info.

  • Hi Annie,

    No problems, this is the best place to ask as it allows everyone else who is reading the post to get even that little bit more insight.

    First, let me introduce myself, I’m Josh and a member of the BLITZ Business Success team, and I’ll be answering your questions today:

    In WordPress there are a number of different ways to protect against SPAM. The highest level is of course not to allow commenting, which stops Spam 100%. However, there are other (and I would say better) ways to Stop 99% of Spam, and insure that nothing is seen by your readers. Within WordPress, there is a function that allows you to automatically block any message that has two or more links (as often Spam messages have multiple links), in addition, there is a function that will make it so every comment must be approved first.

    To go deeper you can install Plugins (there exactly what you think a plug-in would be), and they can support things like CHAPTCH (those odd words you sometimes have to write to submit a comment), or have a better Spam detector.

    Hope this helps

    Josh

  • Hi Jilly,

    That’s a hard questions to answer as even simple websites can become complicated quickly.

    First let me introduce myself, I’m Josh and I’m part of the BLITZ Business Success team, and I’ll be answering your question today

    Alright so you’re looking for a website – here are some general questions you’ll be asked:

    Are you looking to change your site often?
    Would you like to be able to upload your own content (like text, images and videos)?
    Do you need a database to capture information (like email, address and such)?
    Do you need an area that is password protected?

    If you answered no to all this, then what you’re looking for is a static website, where you would develop the content, hand it over to the developer and they would build / update the site for you. This can cost between $400 – $1000 depending on the graphic work, and content work.

    Anything above this, and you’re looking at a hybrid or a dynamic website – These do cost more, but an alternative to spending the big bucks on a custom CMS (content management system), you could use something like WordPress. Although all the functionality is not there, it’s more than enough for most peoples needs.

    So long answer short, even a cheap website (the lowest) can cost $400, as it takes time, registration, and development to get it online and onto the web. Although I know it’s not bricks and mortar, this is your store, or office online (and where most people will have their first interaction)

    Josh

  • Thanks Ellis.
    I’d be interested in knowing what you found that you were looking for.
    Barb

  • Thank you Annie:
    I’m honoured that you want to point people to my site. Please go ahead.
    Barb

  • Thank you Toney:
    I hope you find more info that interests you in the back posts and in the future.

  • Thanks Drucilla:
    I not quite at the daily blogging level yet, but I hope my weekly content keeps you interested. Let me know if there is some other subject you would like to hear about.

  • Years of education, training and experience. I’m one of those life-long-learners.
    Thanks Quintin

  • Great answer Josh:
    Just so you know Jilly this website cost me about $800 to have it implemented (including a years worth of hosting, images and domains), but I am fairly tech savvy so I was able to prep all my content and images ahead of time. I purchased my domains, my hosting, and my images myself. I also spent about $1000 on professional branded images and logos that I sent to the web designer to implement.
    Josh is right, this is not a “brick and mortar” place but it is your business location so it had better really represent the experience your clients are looking for.

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