Setting a price

May 27, 2009

Price – what is price? Price is the perceived value that someone is willing to pay for a product or service in a market. It is a perception and therefore relative. Take a garment. If you put a dress in a boutique in a down-market part of town you could probably demand and get thirty to fifty euro/dollar for it depending on circumstances. Put the exact same garment into a high-end department store and nobody would pay less than one hundred and fifty euro/dollar for it. In fact if you were to put it on the racks in a high-end department store for fifty euro/dollar nobody would buy it as they would consider that it must be sub standard. Price reflects value. The higher the perceived value to the market the more the market is willing to pay. If you set your price below the market expectation you will not sell. Many businesses have sold more by putting up their price.

In some markets price is given. We all know the general price for milk or bread and will not pay outside a general price band. In economics we refer to these markets as perfectly competitive markets, where there are so many people in the market that no one operation can set a price higher than the market price, so all sellers take the equilibrium market price. Not all markets are like this. Specialist markets exist where customers do not have a great knowledge of the market and thus the seller can set a price within reason.

Another aspect of pricing is what is referred to as “Price Elasticity of Demand”, a flashy economics term which has definite and real effects on your price. If a product is price inelastic then demand does not fall off heavily if there is a price increase. For example petrol is price inelastic in the short term. If petrol goes up in price we still have to buy it to get us from A to B. However, many products are price elastic. In this case a small price increase can result in a sharp fall off in demand. Share prices can give an example of this. If a large company produces lower than expected profits then the share price can fall dramatically. Even though the company is still sound and still in profit an unexpected profit reduction can see 10 – 20 % fall in share prices.

Thus there are many aspects to pricing a product or service. The old advice of charge what the market will bear is a good one. Price cutting is a dangerous strategy, as if there is a set market price and customers are already willing to pay it, then why should you devalue your product or service by undercutting prices. And remember that the same product can be valued differently in different markets and market niches. A one-price-fits-all approach is not always appropriate.

Many people who start a business do so because they have a skill, knowledge or interest in a particular area. Unless they have worked in sales or marketing, most new entrepreneurs have an initial fear of selling. Most new entrepreneurs do not even know the difference between sales and marketing and whereas I may be about to upset the entire professional marketing community, I will at least try to explain the difference.

Marketing is the study of a (more specifically to you: your) market. A market is made up of three broad components: your customers, your competitors and your company (known as the 3 C’s). The main focus is on the customers, so if you can identify different sub groups of customers you get niche markets. The purpose of marketing is to try and identify what are the different customer types relating to your goods and services, their different tastes, needs and especially, how the different customers want to access the goods and services from you. Marketing is a ‘macro’ exercise. It is about starting with large groups of the population and breaking them down into relevant sub groups and even smaller sub sets of people interested in your product or service.

Selling is a one-on-one process; it is the ultimate ‘micro’ activity’. Marketing should help you identify why you are going to talk to this person/company and what you might be able to broadly offer them and why. Selling is about communicating with the person. Let me start by saying that selling is not about forcing people to buy something they do not want. In fact, the most difficult part of selling is understanding the process. Sales people ‘ask questions’ of their clients, they do not ‘tell’ people anything. The process is to ask the client relevant questions as to their need and allow the customer to come to an understanding of their need. The salesperson is not an active part of the process which is about the client learning about their needs and what solution you can present. You are purely a channel of communication, if this is done correctly.

As I have said before, five people can start the same business at the same time in the same area. One will succeed the others will not. The one person who understands their market and how their customers want their goods and services is the one that succeeds. The biggest early mistake made by new businesses is to start thinking of themselves as the centre of the business. Successful businesses focus entirely on their customers and nothing else.

According to academics there are primary, secondary and tertiary sources of market research. But we don’t have time for all that, do we? At the heart of every business plan is hard facts or estimates based on the best facts available. Without this all of your projections and assumptions are useless. Many people ask how financial projections can be made in any accurate fashion. The answer is to base as many figures on best information available and make realistic estimates on the rest. Here are some ideas aimed at getting these facts and figures.

• Start by examining your competitors. Who are they and what market segments do they serve? Are there seasonal factors affecting your markets? Do you know anybody who has worked for one of the competitors and will talk to you? Find out as much as you can about your business competitors.
• On general market size there is the Central Statistics Office. The CSO keep a wide range of statistics on markets, imports, exports. So this will help you assess what market share you need or whether your sales projections are realistic. However, be careful about using gross statistical data. The information you are looking for may not be in one data set and you may have to gather information from different data sets. An example being the person who once tried to convince me that there was nobody making hand-made curtains in Ireland, as the Irish CSO didn’t have anybody recorded under this heading. Remember, many hand-made curtain makers see themselves as interior designers or under some other label. Make sure you get all the relevant information together before making any conclusions.
• Trade magazines are a good source of information. Successful companies are only too happy to brag and if you don’t want to spend all that money on expensive magazines, your local public library holds a wide business reference section for you to read. Trade magazines are also useful for identifying trends in your industry.
• Newspapers are a good reference source. Each week the business and jobs supplements give comprehensive coverage to business. Again back editions are kept in the public Library.
• If there are similar businesses that are not in direct competition to you they may well be willing to give you information. They may be willing to give estimates of running costs and seasonality information. They may also give you leads and ideas that you may not have considered.
• Wholesalers and suppliers will also be able to give you credible information. If they are supplying to you then they have an interest in giving you accurate information and making you succeed. In particular, they may be able to give information on the business cycle for the sector you are intending to enter.
• Many large companies and bodies issue annual reports and accounts and may even give breakdowns by region or market sector. Again these are ways to verify market size, sales projections but also product mark ups and margins.
• Hard neck is also a useful market research tool. If you ask people for information they can either give it or not. You may be surprised by the number of times people give information without thinking about it.

These are two very important elements to you initially, when starting your business. Packaging can have a great deal of impact to the final user. The first role of packaging is to ensure that the product gets to the final user in peak condition. In some cases the packaging also has a very important sales and marketing function. The issues you must address are:

• How do we currently, or intend to, package our goods
• Does this ensure that the product arrives at the end user in prime condition
• Should you packaging have a marketing function
• Does it currently
• How can this be improved
• Is your current packaging cost effective?

Always remember that the first thing a customer sees of a product is its packaging. However, another aspect of getting the product to the end user is the mode of delivery. In today’s business environment there are plenty of options open to businesses in this regard. Some companies prefer to deliver goods in person and this could make sense for high value goods or for goods that require installment or setting up. Most companies will use couriers of some description. There are plenty of private courier companies that will promise same day or next day delivery. Usually they have set rates but they can be expensive for one off deliveries. The national post service has a wide range of services from parcel post to swift post and registered post. The issue with national post services is that your package will be delivered in line with the rest of the service and special deliveries are in the same range as the private courier companies. When deciding the best mode of transportation a number of issues should be addressed.

• How quickly do we need to get goods to our customers, i.e., perishable versus non perishable goods.
• What is the most cost effective method of delivery?
• Is there a marketing aspect to your delivery service?

It is a good idea to think out the packaging and delivery aspects of your business regularly. It is very easy to lose customers due to goods arriving in less than pristine condition or by just being late. These issues need to be reviewed and monitored on an ongoing basis.

All business ventures have to source materials. The extent to which this affects the business however is very diverse. Some service industries may only need stationery supplies, professional services etc. A supply company’s core business revolves on the product or product lines that they sell. A disruption in the supply of a core product can result in either major reorganisation of the business or even result in the business collapsing. Manufacturing Companies need raw materials to produce their products. Changes in product supply, be they driven by market, seasonal, environmental or technological changes can result in major business disruption or even sector extinction. Look at the market disruption caused when CFCs where banned. The entire aerosol market was faced with complete change or complete extinction. Therefore one can define materials supply to a business as a) raw materials, b) essential product range and c) other materials used in the business. So the questions you must ask yourself are:

• What raw materials does your business use, if any?
• Who are your suppliers?
• What other suppliers could you use?
• What are the advantages of using your current supplier?

• What goods do you buy to sell?
• Who are your suppliers?
• What are your alternative sources of supply?
• What are the advantages of your current supply source?

• What other products do or will you use?
• What are your suppliers?
• Can you simplify your sourcing of the products?
• Are they all necessary?

Sourcing suppliers is very important , particularly early on in the life of a business. Whereas price is important, reliability is often just as important. If a supplier is reliable and delivers the right products, at the right amount most of the time, then these are people you want to keep close to your business. However, if a supplier, no matter what price they are selling to you at, lets you down initially or regularly, then it is time to evaluate whether you can find a more reliable source. Reliable suppliers allow you to make promises to your clients that you can deliver. It is very easy for an unreliable supplier to leave you very embarrassed with one of your customers and potentially losing trade as a result. Build a very close relationship with your main suppliers and make sure you look after them in return.

The management plan is a statement of who the management team are and what their relevant skills are and has two main functions.

Firstly, internal: by stating the management of the business, who they are, what they will do within the company and their skills it will be possible to list the management skills required to run the business, outline which skills the management team do possess, and more importantly identify any skill deficiencies. By identifying deficiencies it makes it easier to arrange either training or hands-on experience to redress the balance.

Secondly, external: for someone reading the plan or assessing your business it will enable them to see that all the skills necessary to run the business are present, and that you have identified shortcomings and implemented a plan to correct them. A note worthy of point is that bank managers and grant assessors look at the promoters ability to fulfill the objectives laid down as well as the realism of the objectives themselves.

For many small businesses and in particular for sole traders, one person fulfils the entire management function. In this case a copy of the managers curriculum vitae will compose the first part of this section. However, this should not exclude you from identifying deficiencies in your own skill base and then correcting them. One very good reason for writing a business plan in advance of starting a business is that you can identify training requirements. If you do not have all the skills necessary then you may have two options. First, bring someone with the relevant skills into the business as an employee, contractor or consultant. This has a relatively small up-front cost but you are likely to incur this cost on an ongoing basis. Second, identify skill deficiencies in yourself or other members of the team and arrange training. This may have a high up-front cost but, once trained, there will a much lower ongoing cost. Please remember that if you are unemployed prior to start up then you can avail of training run by public or local development organisations. So make sure that you avail of all the training opportunities you can. Remember that once you become self employed it will become more difficult to find time to train and commercial training is expensive.

However, remember that the management section is the part of the business plan where you get to highlight your skills, ambitions and energy. In a face-to-face meeting you would be able to communicate enthusiasm, energy and commitment. For a person reading a business plan who has not met you, this is the section where you get to make these points and most people, regrettably, do not use this opportunity to stand out. This is one of the three things a professional is likely to read initially to assess the business and it is important.

Business plan contents

May 12, 2009

Many people have asked me for a template for a business plan and I have to answer, ‘there isn’t one’. Think about it, every business is different. They have different markets and market niches and are run by different people with different skills and levels of skills. How could you have a template? However, a better way of thinking about a business plan is that it is not one plan, but a collection of smaller plans and they key to making the business successful is to get the smaller plans to ‘hang together’ into one coherent action plan. In any business plan there will likely be the following sub plans:

A management plan
A operations plan
A marketing plan
A sales plan
An administration plan
A financial plan
An implementation plan
With an executive summary at the start

There may well be other sub plans relating to your specific business. The management plan outlines who is responsible for different aspects of the business, what their skills are and also a plan to address weaknesses. The operations plan outlines how the products/services/programmes will be put together, assembled, delivered etc. The marketing plan outlines the broad market segments applicable to your business and the market niches that you best fall into. The sales plan outlines what processes, techniques etc your business will adopt when dealing with clients on a one-to-one basis. Administration is vitally important and it is essential to get your systems set up early and correctly. The financial plan outlines projected sales, expenses, breakeven sales, cash flows forecast and trading statement, balance sheets etc. The implementation plan is useful at the start as it allows you to draw up a time line for your activities and allows you to prioritise your action. The executive summary is the last thing written but the first thing to appear in the document. There may be other sections for you to address separately.

Thinks about a business plan as having these different elements and then ask yourself how you can blend these different plans into one coherent action plan for your business. The ‘hanging together’ is a key element in a successful business plan and eventually, a successful business.