From the course: Creating a Business Plan

Pricing your product

From the course: Creating a Business Plan

Pricing your product

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- Pricing is one of the most critical decisions you're going to have to make. And your business plan needs to spell out your pricing model as clearly as possible. You need to understand even a 1% differential on pricing can have a disproportionate impact on your total profitability. Let's assume your business has a 10% profit margin. If you raise prices by just 1% on the top line for revenue, you've increased your profitability by 10%. That 1% will go from your revenue line all the way to the bottom. And your pricing will drive margin from 10% to 11. Pricing is huge. Do not under-invest in thinking about it. So how do you come up with your pricing? Benchmark some of your competitors. Look at their pricing model as well as their price points and use those price points as anchors for pricing your own service. Also, determine your pricing model and the rationale behind it. Are you going to sell on a cost-plus basis? Are you going to sell on a value basis? Is it going to be a one-time fee or ongoing fees or some combination thereof? Laying out this model is critical because you're going to have to message it to the market as well as build the model into your ultimate financial model as part of your business plan. Allow me to illustrate. For my business, we run a training firm. We could have a cost-plus model where we say here's what an instructor costs for one day and we're going to add this percentage on top in terms of a profit margin. We could also have a value-based pricing model where we say every participant in class pays a fee because they're all getting value from participating in the training. And we look at the value they get and then we price our service as a portion of that. Our per participant fee is 25 to 40% less than comparable offerings in the marketplace when we look at the different business models that are out there. And having this very clear understanding of our pricing model, where it stacks up in the market, as well as the value that we deliver to the customer helps us have a very clear way of describing how we're going to market in terms of pricing. You need to have the same level of clarity in your business plan because it will affect how you sell as well as the ultimate financial performance of your organization.

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