http://www.qed-consultancy.co.uk Copyright Jeremy Thorn QED www.qed-consultancy.co.uk en-us Making money from selling a service or product is not usually very easy. So plan ahead for the likely reactions to your pricing and marketing strategies, from both your customers and competitors; share your thoughts with your team and business advisers, don't fall into the temptation of flying by the seat of your pants; and be prepared to change your strategy if it does not appear to be working. Engineering Adventures Ltd 2007-03-25 Do your market research. Then look for your opportunity. Market research is not so very expensive and may well reveal gaps in the market you never knew existed. Engineering Adventures Ltd 2007-03-25 It is better to establish at an early stage whether it is growing or declining, your share and whether there might be more or less scope for you amongst your competitors, rather than later. Engineering Adventures Ltd 2007-03-25 Almost certainly, different parts of each market will act differently from others. For some, price may be all important. For others it may be availability, service, performance, brand image, packaging, the personality of your sales representative or any mix of these. Engineering Adventures Ltd 2007-03-25 See whether it is bound by age, type, location, status, size of organisation, or any other differentiator. It may be appealing to choose to sell to anyone who will buy, but targeting selected market(s) will make your job very much easier. Further, if different people buy for different reasons, or in differing circumstances, you may well want to charge different prices. Engineering Adventures Ltd 2007-03-25 These are the people who are going to work night and day to stop you being successful! So find out why customers buy from them, and how they do business, so you can build a strong platform from which to compete. Engineering Adventures Ltd 2007-03-25 Offer them something different, better, easier, quicker, more reliably, more effectively - or if you really have no other differentiating benefits to offer - just cheaper. Engineering Adventures Ltd 2007-03-25 Charging a consistently lower price may be difficult, unless you have deep pockets or a secret formula. So try to seek a longer-lasting advantage if you possibly can. Engineering Adventures Ltd 2007-03-25 If you can only hope to attract customers because you offer something that is cheaper than others, ask yourself what might stop anyone else under-cutting you. A business plan based on just being cheaper is not often sustainable - there are always going to be people ready to fight you on price, whether they will make money at it or not. Engineering Adventures Ltd 2007-03-25 Don't forget to include your office, administration, financing and ancillary costs, such as packaging, promotion, insurance and warranties. You will of course want to charge more than your costs, but you might also see how you can reduce these. Cost should not determine what price you are going to charge, but it will help you decide how attractive your business idea might be. If your profit margin looks too thin, either you are not planning to charge enough, or your idea may not be worthwhile. Engineering Adventures Ltd 2007-03-25 Be sure to take a conservative view and decide whether this can meet your needs. You will probably need to do this several times, with different planning assumptions (including your pricing strategy), but do not run the risk of embarking on a pricing strategy you cannot sustain. Engineering Adventures Ltd 2007-03-25 Customers may not react as you hope they will, competitors may be smarter than you thought. So hope for the best, but plan for the worst! Engineering Adventures Ltd 2007-03-25 Many good ideas fail because they were not fully funded. If you need to borrow money, you will need to make a good case to your lender. This booklet can help you, but find a good adviser to help you write a sound business plan too. This may cost you some money, but failure to get good advice might cost you more. Engineering Adventures Ltd 2007-03-25 They all need to interact to produce the model you are most happy with. A plan will not only help you to see other options and choose the best, it will also help you track your progress and identify any areas of possible weakness that may need to be addressed as you proceed. It is a cliche, but if you fail to plan, you plan to fail. Engineering Adventures Ltd 2007-03-25 If you are going to have to invest a significant amount of money in this project, be sure you can afford to lose it. Alternatively, seek business partners who might share the risk with you. Engineering Adventures Ltd 2007-03-25 Some advisers may be too cautious for you, others too adventurous, but listen to them all. Most will have experience and knowledge from which you can benefit. Engineering Adventures Ltd 2007-03-25 If you have a good product or service, your greatest risk may be to sell it too cheaply. But make sure that you have a genuine advantage over what the competition offers if you possibly can. Otherwise, why should people buy from you?? Engineering Adventures Ltd 2007-03-25 Never under-estimate your opposition, the intelligence of your customers, or the natural scepticism of many buyers towards new entrants. Above all, don't fool yourself! Engineering Adventures Ltd 2007-03-25 If they are paid by results, of course they might reasonably want an easy life. But their customers will also be telling them constantly that your product or service is too expensive, as part of their negotiating strategy. Wouldn't you do the same? So listen to your customers' comments carefully, but be sure to distinguish between genuine market advice and a buyer's attempt just to get the price down. Engineering Adventures Ltd 2007-03-25 For example, decide whether you want to capture a modest slice of your chosen market or seek to be a market leader. These decisions are fundamental in deciding your pricing strategy. Engineering Adventures Ltd 2007-03-25 Choose whether you need income quickly, or perhaps might wait to seek higher rewards in due course. Engineering Adventures Ltd 2007-03-25 In a market that has too many suppliers, or where demand is falling, over-supply will inevitably mean lower prices. If so, be clear on the impact of this on you. Engineering Adventures Ltd 2007-03-25 If you rarely lose any business, you are probably charging too little. If you win very little, it may well be that your prices are too high - but there could be other reasons. Your price could be too low to be credible, or it could be that your customers do not have faith in what you offer. Engineering Adventures Ltd 2007-03-25 Decide for yourself, but if your product is superior, you should almost certainly be charging more. Engineering Adventures Ltd 2007-03-25 You should be able to charge more, all other considerations being equal, if you are known and trusted by your customers and you really understand what they want and how they work. Engineering Adventures Ltd 2007-03-25 Decide how they might react to you as a competitor and what this may mean to you. If a low price from you might stimulate a trade war, for example, be sure you can sustain one. Engineering Adventures Ltd 2007-03-25 Find a way that will encourage you customers to buy from you, rather than anyone else, by adding value to what you sell. Engineering Adventures Ltd 2007-03-25 If you want to charge higher prices, it is vital that you offer your customers something extra worth paying for. Engineering Adventures Ltd 2007-03-25 That way, your price will become more sustainable. Engineering Adventures Ltd 2007-03-25 If you add new elements to your service for example, be sure they are properly costed. You may or may not wish to pass these costs on, but don't fool yourself that they don't exist, or that they won't need paying for. Engineering Adventures Ltd 2007-03-25 For example where prices are highest or where service costs are lowest, or whether you want to be attractive to as many people in the market as possible. But note, claiming to be attractive to all classes of customer at once is not often very convincing to prospective customers! Engineering Adventures Ltd 2007-03-25 So be cautious about making promises you may not be able to keep. Spend time in getting the service quality right on a small, pilot scale, if you possibly can. That way, you can charge more, more safely. Engineering Adventures Ltd 2007-03-25 For example whether they might add new pricing pressures, re-define product standards, or even criticise your product. (But note: good practice suggests that you should never criticise your competition. Let your competitors' products and services speak for themselves!) Engineering Adventures Ltd 2007-03-25 Such as minimum pay-back on your investment or cost-plus pricing, or market drivers, based on what the market will bear. Engineering Adventures Ltd 2007-03-25 However, few truly know their costs and this strategy pays scant regard to what the market thinks the relevant service or product may actually be worth. If your business is to be market-driven, which is usually the case, a market-driven pricing must be your preferred way forward. Engineering Adventures Ltd 2007-03-25 Jeremy Thorn is a prize-winning author and Chairman of Quantum Enterprise Development (QED), a multi-functional management consultancy and development company based in Doncaster, England, dedicated to making good businesses better, encouraging customers to be more loyal and to helping employees and suppliers be more effective. Engineering Adventures Ltd 2007-03-25