Business advice

Pricing Strategies
July 31, 2007, 9:21 pm
Filed under: Business Advice, Uncategorized

Many small business owners don’t realize that they can run their shop with a several tiered pricing structure and still be successful. This by my definition means profit. There was a recent article in Business Week that discussed Bill Gates’ endeavors to do business in China. He lost millions when first entering the market because he was trying to use the same pricing structure he used in US. It didn’t fly. His answer to the interviewer on this issue, “…we had to keep trying.”

One cannot completely avoid all such similar errors, because there is a good chance new market niches for your products will open as your business grows. Before making a new move, you need to analyze marginal costs for this new set of buyers. (Marginal cost is equal to all monies required to push the next unit out the door into the hands of the next buyer.) If you are considering a market where their buying power is significantly smaller, as in China, you may need to reconfigure how you produce this inventory. In a similar case, it might require outsourcing production to a source who uses cheaper labor.

You probably don’t realize that you see different pricing structures all over the aggregate market. Movies have matinĂ©e pricing. Bus lines and many restaurants have special offers for seniors. This pricing strategy, with pricing layers, allows any business owner to expand into a market that might have been previously closed.

As long as you understand how to calculate marginal costs so they will eventually be equal to marginal revenues, for all your markets, you will continue to succeed. If you don’t work at different pricing structures, you will lose out on potential expansion and longevity.

In our changing economy market niches change continually. Keeping up comes as part of the job of being a business owner.


Making A Pricing Decision
July 9, 2007, 7:21 pm
Filed under: Business Advice

This may seem to be a simple concept, but nothing is farther from the truth. When it comes to economic decisions, there are always two sides to the picture. Taking the cheaper option may end up costing more later on.

Business owners, during a growth spurt, may find their previous equipment not up to par. A small convenience business I once frequented was having a problem with one of its coolers. They had been repairing it for awhile and then read one of my articles. They bit the bullet and bought a newer model, which was also bigger. They also did catering. They now had the ability to take on bigger jobs than with the smaller freezer, which cost them worry time about when it was going to break down again.

I realize that most fairly new/small businesses may be strapped for cash. If you are in a growth state, the first thing you need to do is get financing to go along with the additional expenses. Be sure to include the need for more equipment. If you have the numbers to backup your projected growth, many bankers will use that to add to your credit evaluation.

You also have a gigantic pricing decision to make when it comes to the product(s) you are going to sell. Looking at your competition is only one part of the picture. You need to fully examine how much it is going to cost to move each one out the door. Not doing so can lead to disaster. Years ago, I had a PR client who had a line of spices she was selling to gourmet shops, etc. What she didn’t find out until it was too late, was her designer bottle cost $1.25 more than her closest competitor’s. This with another deadly mistake put her out of business. Every time there was a sale, she got deeper into the red. Don’t make this fatal error.

Service companies, of course, have a different road. Checking out your competition is a must. Getting credentials in the beginning isn’t that easy. Take on a client at a lower than market rate only if they are so well known that they will give you great ‘creds’ by just being on your client list.

Next time, we will talk about marginal cost and supply and demand. All of which are necessary components to making wise pricing decisions.

Laura Bell