Business Plan

Pricing

As a small business owner it is essential to your success that your pricing policies take in to account your business idea, competition, location of your business, cost and availability of supplies. You need to find the right price for your target market. For this purpose we will introduce you to several pricing policies and techniques.


Pricing Policies - Information
(to be used in your writing - see below for assignment instructions)

Cost Oriented Pricing – businesses calculate the costs of acquiring or making a product, their expenses of doing business, and then add their projected/desired profit to arrive at a price. There are two ways of doing this:

  1. Markup Pricing – is the difference between the price of an item and its cost. Generally used by retailers who acquire goods for resale.
    • cost (c) + markup (m) = retail price (rp)
    • example – shirt ($10) + markup (50%) = rp ($20)
  2. Cost Plus Pricing – Costs and expenses are calculated and then the desired profit is added. Generally used by service businesses (graphic arts, ISP's, contractors, etc).
    • Expenses (parts and/or materials) + labor + profit = price
    • example – building supplies ($700) + labor ($30hr x 5) + profit (10%) = price ($935)

Competition Oriented Pricing – when businesses study their competitors to determine their prices.

  1. Going Rate Pricing – aligning prices with competitors

Pricing Techniques

  1. Psychological Pricing – creating the illusion that your customers are getting a great value.
  2. Odd–Even – setting prices that end in either all odd or all even numbers
  3. Prestige Pricing – setting higher than average pricing to suggest status
  4. Promotional Pricing – items are reduced for a short period of time
  5. Price Lining – all merchandise in a given category is set at a certain price (i.e. - all blouses $25)

New Product Introduction

Skimming Pricing – setting a very high price on a new product to capitalize on the initial high demand.

Penetration Pricing – the initial price for a product is set very low.

Farese, et al. (1991). Buying and Pricing Merchandise. Marketing Essentials (Chap. 30, pp. 332-340). Lake Forest, IL:
Glencoe Publishing.

Supplemental Material

Read the following short article Pricing Strategies from the Netmba and pay particular attention to Pricing Objectives


 

Assignment Instructions - for inclusion in your business plan

Introduction – Write a short introduction to Pricing that explains why it is important for businesses to price their products correctly (what results from incorrect pricing - too low or too high?)

Explanation of Pricing Options – Describe how you have looked at different pricing options and feel the following (from below) will be of greatest benefit to your company.

Bullet Points – for each bullet point, write 2-3 sentences explaining each of the following:

  1. the Pricing Policy you will be using and why.
  2. the Pricing Technique you will be using and why.
  3. your strategy for New Product Introduction.

Conclusion

    • Conclude the section by emphasizing the importance of implementing effective pricing strategies, policies and techniques.  Use one of the conclusion strategies – Simple Summary/Frame or Circle/Proposal or Call to Action

     

Pricing Tips – think in terms of how these policies will:

  • get the product or service accepted by the community
  • help maintain (and hopefully increase) your market share in the face of competition
  • produce profits

Save as "Pricing" in your Business Plan folder

 


    Pricing Example from Rylee Jakabosky '17