There are a number of pricing strategies that you may want to adopt throughout the course of your business depending on the situation. Here you should describe the pricing policy that you wish to adopt as a start-up business. There are several pricing strategies that you could consider using, including; introductory offers, promotional offers, discounts, special offers, market penetration pricing (low introductory prices to grab an initial share of the market).

One important thing to remember here is that it is very easy to lower your price, but much more difficult to raise your price back up again. Your pricing over time should be stable (once the introduction period has ended, for example), and you should avoid confusing the market by frequently raising and lowering your prices.

Also don’t be afraid to increase your prices once a year, 5% is usually an acceptable increase, higher than 5% might require some explanation. Your suppliers will be increasing their prices on you so if you don’t at least pass this on it will eat away at your profits. A 5% increase is not really that much and some customers may not even notice this marginal increase. However over time, this will impact your profit considerably. Always advise your existing customers of a price increase (however small) and briefly have a courtesy statement as to why this increase is necessary, a increase from suppliers and the time since the last increase will usually suffice.

For some products and services, you may be guided by the price that the market demands (what the competition price is), however if your product or service is clearly differentiated then your price should be considerably more than the competition.

Higher pricing strategies should always be monitored to make sure you are not pricing yourself out of the market. Provided you promote your product extensively and regularly and maintain your point of differentiation, then you are on the right track. Have you ever seen recently produced Apple products discounted? Have a matrix that identifies what products or services that you offer and where they sit in the overall scheme of things. a suggested matrix (that I use) is shown below.

This gives you a quick snapshot of where your products sit in each of the markets you are in and how you might structure your pricing. The model serves as a justification for your pricing strategy based on a number of factors. You may decide to change Moderate, Medium, High’s and Low’s with percentages if you wish.

Keep an eye also on the last time the product or service was updated or modified. Your customers will not be too keen on buying an outdated product or service particularly if the competition has new and regularly updated products that compete with yours on every level.

A simple change in packaging or a slight modification can maintain (or even increase) your price and a promotional campaign around all this can relaunch this product to even greater levels that before. Think what Apple did with the existing iPhone 5, which became the iPhone5c and 5s and how they reinvented the product and made even more sales the second time around.

I know now you are thinking well that’s all well and good but I’m not Apple, I know you are not! All I am saying is you think about some of their marketing methodologies, and how you could apply some of these into your own business. When I train businesses in marketing strategies I always use Apple as a good example.

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In any business there are three possible ways to improve profit, these are:

  1. Increase sales volume
  2. Raise selling prices
  3. Reduce costs

If the outputs of your business are services rather than physical products, this can be restated as:

  • Increase the quantity of services provided
  • Raise unit charges, for example hourly fee rates.

Sometimes marketers use more sophisticated terms than these, for example, they may refer to:

  • Changing the product mix
  • Altering the gross profit mix of product range
  • Changing the customer mix

But each of these variations are the three basic strategies to improve profit.

Why not just lower prices?

Stagnant or shrinking markets could be characterized by intense competition. Many businesses operate in these markets by trying to maintain or increase their sales volumes by lowering their selling prices to meet competition. This in turn reduces the gross margin on every product sold.

For example, in Table 1 the first column shows a profit plan for one year, assuming a selling price of $10 per unit sold.

The second column is an alternative plan showing what the business hopes to achieve in the same year, but this time with the selling price per unit reduced by 10% to $9 to meet the competition.

Screen Shot 2015-12-30 at 2.50.27 PM

If your business consists of service products rather than physical products, then the unit price shown in the tables will need to be converted to Service hours charged.

In practice however, the strategy of lowering and selling prices is very dangerous.

1. Little volume increase:
In an intensely competitive market situation it is most likely that competitors are also reducing their selling prices. That is a price war in progress.

Accordingly, instead of increasing sales by 15,000 units as in the second column of table 1, it is probable that the business will achieve little if any increase in volume as a result of reducing its prices by 10%.

2. Indirect costs increases:
In table 1 it is assumed that indirect costs will remain constant at $200,000 when unit volume increases by 15,000 units. In practice however, an increase in volume cannot rarely be achieved without a greater input of indirect costs. This is particularly so in a highly competitive market.

For example, extra expenditure will be required on items such as advertising and other promotional costs, salesmen's commission and salaries and distribution costs.

These projected factors have been built into table 2 where it is assumed that the following events what occur if the business reduced it selling price by 10%:

1. Sales volume would rise buy 4% from 50,000 to 52,000 units.
2. Indirect costs would rise by 5% from $200,000 two $210,000 as a result of the greater input required to achieve the 4% increase in sales volume in the highly competitive market which the business operates.

The numbers in the second column of table 2 are indicative of the disastrous results of a business which reduces selling prices in a bid to increase sales volume, while operating in a highly competitive market.

Screen Shot 2015-12-30 at 2.50.39 PM
Further problems caused by inflation:
At this point we also need to consider the further the complications caused by inflation. In a high inflation situation both the direct and indirect cost of the business (as shown in table 1 and table 2) will typically be increasing.

These increased costs can be financed from two possible sources, these are:
1. Net profits earned by the business
2. Cash injection from outside borrowings

But as shown in the second column of table 2, lowering selling prices in a competitive market situation reduces net profit. Table 2 shows that the business would have made a net loss of $2,000 if prices had been reduced by 10%. In these circumstances the business would need to borrow more funds from outside sources to finance increases in operating costs in the following year.

A business which attempts to maintain or increase volume by reducing selling prices in an intensely competitive/ high inflation situation may suddenly find it has little if any net profit remaining.

Alternatives to lowering prices:
The three methods you can use to rise the net profit of your business, are therefore:
1. Increase sales volume
2. Raise selling prices
3. Reduce costs

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PS: Be sure to see our related blog -  “"Did you know that break-even is a widely misunderstood calculation"

Enjoy!

Here's a quick and easy way to calculate the break-even point for your business, and a FREE download tool to calculate your own break-even!

There can be many complex methods that require charts to decide the break-even for a business. Whilst this may be required for medium to large manufacturing operations with a complex array of products to monitor on an ongoing basis, for most of us we just require a quick and dirty way to calculate break-even.

Also did you know that by tweaking the break-even formula we can set a desired profit level for our business? More on this in a moment.

Break-even is a point when a business sells a certain number of units that cover all business expenses (note: – the business has not made a profit at this point). These units can be products or items of service. We will cover this process for a service-based business in our next newsletter issue so stay tuned for this!

So here goes, break even is the volume of sales (or sales dollars) required to cover fixed expenses (overheads).

The Process: (1) Sales – cost of goods = gross profit (GP), (2) GP/sales = GP% (margin). As I said earlier there are many long-winded ways to explain break-even, here is a quick and easy way to calculate this.

Here is an everyday Profit & Loss Report snapshot:

_Table 1 PIX 2

What you do here is look at 2-areas, fixed costs and gross profit % to sales. Remember here that the % cost of goods sold will remain the same, as of course does the $ value of the fixed costs.

So then divide the fixed costs by the gross profit (0.40), then you get 30,000/0.4 = $75,000 and this is the level of sales required to break even.

This means that at the sales level of $75,000 there is 0 (zero) profit dollars as can be seen in the revised profit & loss report (table 2) below.

_Table 2 PIX 2

Note: Gross profit is sometimes referred to as contribution margin. This is because it contributes towards the operating costs (overheads or fixed costs) of the business.

Force net profit: This is a really cool way to calculate your desired net profit, using part of the same formula that we just used for establishing break even. And I have a great Free tool for you to help you do this (see the bottom of the page).

So we know to find the break-even value using the examples in Table 1 and Table 2 above. First we need to look again at our break-even result in Table 2.

We know the following:

% cost of goods sold (this does not change) see 2 in table 2.
% gross profit (this does not change) see 3 in table 2.
Value of fixed costs = $30,000 (this does not change) see 4 in table 2.
So to calculate your desired net profit simply add this value to the break-even formula, as follows, say you want to achieve $15,000 net profit for your business, the force net profit formula is:

= fixed costs + desired net profit value/gross profit %

= 30,000 + 15,000/0.4

= 45,000/0.4 = 112,500

So to achieve a desired net profit of $15,000, you therefore, need sales of $112,500.

Refer to table 3 below.

_Table 3 PIX 2

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For at least three days, maintain a detailed account of your activities, this will tell you where you are spending your valuable time. A week could be better, particularly if your business is cyclical and certain things come up on only on certain days.

These are the steps to keeping a log:

  • Note today's date, list three to six goals for the day, tasks that must get done today. Set a deadline for each one.
  • Record each activity as the day progresses. Every time your attention shifts from one thing to another, write down the diverting activity, no matter how trivial.
  • This means you will record all interruptions, noting their sources and reasons.
  • Make a note of how much time you spend on each item.
  • Set a priority for each single item.
  • The point is at the end of the day you will look back and see what proportion of time was spent on high priority work.

Use the following weighting for this exercise:

1 = Important and urgent (must do)

2 = Important (should do)

3 = Routine (could do, or delegate)

4 = Wasted effort (why did I do that?)

In a comments column, record your ideas and thoughts on how you might have  done things better (or been more productive). Some people like to go back and do this at the end of the day. I suggest that you make comments as you go along because they are fresh in your mind.

Once you have done this for a few days or more, you can easily see where the time wasters are, and these are the barriers to your productivity. Also you can see where you need to be more disciplined in your business!

Good luck, and stay focused!

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2

Before you start:

  • Gather the necessary material and arrange it in a logical sequence.
  • For best results, maintain a content theme and format by using common borders page layouts and colors.
  • Ensure the correct placement and usage of the company logo, if applicable.
  • Most people only absorb about three key points from a speech.
  • What about those key points and how are they best communicated visually?
  • Remember that the visuals are used to emphasize important points, not to reproduce the speaker's notes.
  • Illustrate one topic per slide.

Determine your objective, are you instructing, informing or selling a product or idea?

  • Choose a font that is easily comprehended and large enough to be seen.
  • Do not use capitals. Upper and lower case is more easily comprehended.
  • Limit copy to 6 lines maximum per slide and 6-7 words per line.
  • Use the titles to make a statement, but keep them short.
  • Use a larger font font for the slide title, 36-point is the minimum.
  • Use color to highlight important points and add interest.
  • Use complimentary colors.

Consider the impact of different colors.

- Blue portrays calm and quiet, gives a positive feeling and is ideal for the background.
- Red is related to danger, alertness and problems, use it sparingly.
- Green is seen as restful, cool and assured.
- Yellow is warm and vibrant, it gives a feeling of energy.
- Use tinted backgrounds to reduce glare and aid concentration.
- Use light colors for text and for emphasis.
- The best text colors are white, light green, light blue etc.
- The eye is naturally drawn to yellow.
- More than 4 feature colors, including the background, can reduce comprehension.
- Use illustrations and diagrams that are relevant.
- Use symbols to draw attention to important points.
- Use dark colors for background and avoid gaudiness.
- Use color, rather than underlines, to make important points stand out.
- Avoid overuse of italics, dropped shadows, bold and color emphasis.
- Remember when using color, that 4 percent of men and 1 percent of women are color blind.
- Charts are an ideal way of conveying information and they should be used to emphasize a point.
- Line graphs show relationships over a long period of time.
- Bar charts show relationships over short periods of time.
- Pie charts show percentages.
- Organizational charts show structural relationships.
- Flow charts demonstrate the flow of data and processes.
- Gannt charts show time flows and interdependencies in projects.

Preparing the presentation:

  • Become familiar with the room and its layout.
  • Check seating and lighting and the data projector position for optimal viewing.
  • Before starting check the equipment and learn the controls.
  • Try and keep a spare data projector lamp (these are expensive though).
  • Focus the data projector and adjust to obtain clear images.
  • Go to a black screen when you are talking for a long period or using a white board.
  • Ensure that the audience have an uninterrupted view of the proceedings.

 Verbal presentation tips:

  • Speak clearly and use simple language, avoid complex sentences.
  • Involve your audience, challenge their preconceptions.
  • Ensure that the image matches the spoken text.
  • Use rhetorical techniques to maintain interest, change voice intonation and vary tone and volume.
  • Use pauses for effect.
  • Rehearse your presentation to get it right!

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These are some of the skills needed for successful negotiating...

  • effective speaking
  • effective listening
  • a sense of humor
  • a positive attitude
  • respect
  • self-confidence
  • emotional intelligence
  • persistence
  • patience
  • creativity
  • endurance

Without the above factors, negotiations will be difficult if not impossible. The necessity for negotiation arises because neither party will be able to get everything they want. Knowing that there must be concessions, each party in the negotiation is required to adopt an attitude of understanding that they must get the best deal possible in a way which is acceptable to the other party.

The importance of effective speaking and listening is clear; it is necessary to establish what you are looking for and what you are prepared to accept, while understanding what the other parties will be happy with.

A sense of humour and a positive attitude are essential because they allow for a sense of give and take. Negotiations can become fraught, and having the ability to see the other side’s point of view while being sanguine with regard to what you can achieve will be essential. Of course you will want as much as you can get – but the other side needs to achieve what they can, too.

Seriously uneven negotiations will simply lead to further problems along the line. An atmosphere of respect is essential. If you do not make concessions while demanding them from your counterpart, it makes for a negotiation which will end in dissatisfaction.

However important a sense of understanding for your "opponent" may be, it is also necessary to have the confidence to not settle for less than you feel is fair. Good negotiators understand the importance of balance. Yes, you will have to make concessions, but the point of making concessions is to secure what you can get – so you need to pay attention to your bottom line and ensure you are not beaten down to a minimum.

Knowing what is realistic, and ensuring that you can get the best deal, relies on being ready to insist upon something that the other side may not be willing to give initially. Emotional intelligence, persistence, patience and creativity can all play a part in this process!

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