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Bringing Your Product to Market 4.5. Business Analysis

4.5. Business Analysis

In the business analysis or business plan phase, you work out the business projections for your product concept:

  • Estimated price―based on what consumers have told you and what the likely response from your competitors might be, you set a price that will maximize profits. That is, you have to determine a price that people are willing to pay and that has healthy margins for yourself.
  • Estimated sales volume―based on the price you have chosen, how many units of your product or service are going to sell in the first year? Second year? Third year?
  • Estimated profit―based on your project sales volume, how much profit are you going to make your first, second, and third years?
  • Breakeven―the breakeven is the minimum number of product or service units you need to sell not to lose money. At the breakeven point, you have sold enough units so that you have not suffered a loss, but you haven’t made any profits, either.

Obviously, to project profits or calculate a breakeven, you have to have a pretty good handle on your costs. It’s in the business analysis phase that you work out those costs. How much will it cost to manufacture? How much will it cost to ship your products to stores or to consumers? How much will your marketing cost? Advertising? Web site? You have to figure in all of these things, including overhead, to determine if the product is worth taking to market.

4.5.1. Marketing Teacher: Pricing

http://marketingteacher.com/Lessons/lesson_pricing.htm

Calculating a price for your product is a very exacting science. In fact, some economists devote their entire career to it. In my MBA work, the pricing section of our Microeconomics course confused the bejeebers out of everyone in the class. It’s the one thing in the entire year of courses that almost everyone didn’t get. It’s that complex.

Yet pricing is the most important part of your new product launch. Setting the right price for your product determines everything:

  • Your pricing determines if you’re profitable, plain and simple. Set too low of a price, and you won’t make a profit unless you sell humongous numbers of products. Set a price too high and no-one will buy the product.
  • Your pricing determines how consumers view your company and product. Some companies want to position themselves as low price producers; some want to position themselves as providing high quality. When a company that wants to be seen as high quality lowers its prices, consumers stop buying. That’s what happened to Gucci in the 90’s.

Marketing Teacher (http://marketingteacher.com/Lessonstore.htm) provides introductory lessons in all aspects of marketing strategy and implementation. It covers all the standard topics one gets in an MBA class, but directs these lessons at a general reader. Marketing topics include:

  • Marketing Environment
  • Marketing Strategy
  • Marketing Tactics
  • Marketing Planning
  • Marketing Communications
  • CRM (customer relationship management)

So what’s pricing doing in a marketing site? Isn’t pricing a practical consideration? Actually, no. In classical marketing, “price” is considered one of the Four P’s of marketing―Product, Price, Place, and Promotion. Pricing is rarely just an economic consideration; it’s a fundamental part of maximizing your sales.

You have a number of pricing strategies available to you:

  • Premium pricing—a high price signals that your product is special, high quality, or confers value on the consumer. Is a Mercedes really worth $90,000? Not really. People are willing to pay more because it shows the rest of the world that, well, they can pay more.
  • Penetration pricing—setting a very, very low price to capture as much of the market as possible.
  • Economy pricing—no-frills low pricing.
  • Price skimming—charges a high price at first because you’re the only game in town; as imitators come along, you charge a lower price. Remember when DVD players cost $800? And now they cost $80? They’re not really any cheaper to make now than they were before. The manufacturers tried to grab as much money as possible when the product was still new.
  • Psychological pricing—appeals to irrationality, like setting the price at $9.99 rather than $10. Is it cheaper? Nah. But $9.99 looks more like $9 than it does $10. Go figure.
  • Product line pricing—pricing a line of products, such as haircut, haircut and shave, haircut, wash and shave, and so on.
  • Optional product pricing—adding options to your product to get a higher price and more profits, like all those “service contracts” that retail stores offer you. Those service contracts are almost 100% pure profit for the stores.
  • Captive product pricing—setting high prices on necessary complementary products. Ever notice how cheap printers are? You can get one for $40. But the ink cartridges cost between $20 and $30 per cartridge. The printer companies lose money on the printers but the ink cartridges are 80% or more pure profit. That’s captive product pricing.
  • Product bundle pricing—putting more than one product into one price bundle.
  • Promotional pricing—lowering the price in a one-shot deal to raise awareness and product try-outs.
  • Geographical pricing—prices vary by geographical region to maximize sales and profits.
  • Value pricing—a complex pricing system in which you charge higher prices based on demand, usually time-based demand―for instance, movie theatres charge lower prices for low-demand period times (such as morning and early afternoon), which attracts more consumers looking for a value, but they charge premium prices during high-demand times, such as evenings.
  • Goldilocks pricing—offering different levels of pricing. You can offer a premium product, your regular product, and a value product all at different price points to capture different consumers.

4.5.2. Bradley University: Planning Issues for Small Businesses: Breakeven Analysis

http://www.bradley.edu/turnercenter/start_up_business/business_planning/simple_break-even.html

Calculating your breakeven is the most important part of any new venture or new product analysis. It’s not an easy task, because it involves figuring up all your costs. Unlike a sales forecast, however, a breakeven is reliable. There’s a certain amount of wishful thinking about a sales forecast and unless you pour lots of time and money into it, it’s probably off by orders of magnitude. A breakeven, however, is a reality check. If you add up all your costs, your breakeven occurs when your sales revenues equal your costs. This gives you a minimum sales benchmark to hit if you want to stay in business.

Bradley University in Illinois provides a number of small business and entrepreneur resources in its Planning Issues for Small Business. While there are many explanations of breakeven analysis on the Web, this site makes it as easy as possible for you.

Other articles include:

  • How to Price Your Products and Services
  • Planning Issues for Small Manufacturers
  • Planning Issues for Construction Firms
  • Planning Issues for Service Firms
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