When the Price is Right
Question:
In my business plan, I have completed my market research and competitive analysis, yet how do I address my pricing?
A: Excellent question and good job on developing your market and competitive profile. Your pricing methodology is dependent on several factors, which include your industry, target customer base, competition and your recurring business cost structure.
Here are some common pricing methodologies to consider — all designed to recoup your product and overhead costs with some measure of profit:
- Cost-plus Pricing: Straightforward approach but may not address the competition. Calculate total cost of producing your product or service, including overhead, and then apply a markup percentage (profit) to your total cost to calculate your unit price.
- Competitive Pricing: Establish prices based on what your competition is charging. This helps your product remain competitive in the market, assuming “form, fit and function” are on par.
- Value-based Pricing: Start with either of the two models above, then adjust your profit margin to reflect the unique and/or premium value of your offering. Take note: How does your product/service differ from similar products, what makes it attractive and how are those differences valuable to your customer? Pricing is then based on the perceived value to the customer.
When choosing a pricing strategy, ensure that it aligns with your business goals, target market and competitive landscape. Learn more with Central Oregon Community College’s Small Business Development Center (SBDC), which offers free, confidential professional business advising and a variety of low-cost courses to help entrepreneurs through the business lifecycle.
About the Expert:
Dave Grotjahn is a business advisor with COCC’s Small Business Development Center. He is a retired senior finance leader from Boeing Commercial Airplanes where he led investor relations, estimating & pricing and financial planning teams across many programs. He also supports Habitat for Humanity as a financial mentor, assisting clients in attaining home ownership.
