qprev_HBB Manual 2.qxd - Small Business BC

These were introduced in Chapter Three. Pricingis so key to success that some additionalintroductory information on pricing as it relatesto business finance is included here.Effective pricing depends on business goals. Doyou want to maximize profits, or do you want togo for high growth in sales? In the first case, youmay choose to emphasize quality and service onhigh-priced items for a target market that wantsquality and will pay for it. In the second case,you may want to emphasize high production andhigh sales volume levels, keeping prices low.These two ends of a market – the high end andthe low end – may both be part of yourmarketing strategy, but the ways you use to reacheach may be quite different.Home-based businesses selling a standardizedproduct usually go for growth. They priceaccording to the market, because the markup oneach item is low. Specialty consulting andprofessional services or high- tech firms are morelikely to aim for higher profits on each sale,setting a high price to cover research anddevelopment and to establish a more securemarket niche. In high tech areas particularly,there is no such thing as a “secure” market niche.Competition moves in as quickly as technologychanges, so in this field, basing a marketingstrategy on volume sales over time just doesn’tmake sense.Pricing to the MarketPricing to the market carries with it somedangers. These include underpricing in order tocompete or make sales. The following pointersmay be useful:• Check out assumptions about true costs.Use competitors’ prices to establish theprice range for similar products or services,but don’t underprice. If your true costs arehigher, your final prices will be higher.Competitors may have access to lower pricedraw materials, perhaps because ofa long-established supplier relationship orvolume discounts. If your true costs includecertain features or services that competitorsdon’t offer, they are justified business costsand have to be covered in price. Service isa feature that many home-based businesseschoose to compete on, because they don’tmake the volume of sales that allows discountsor special sales terms.• Check how the competition reacts to yourentering a market. Be prepared for prices tochange, and have a back-up plan in placefor your own pricing. Pricing means more thansetting a price once – it means watching yourprices in relation to sales and to thecompetition in the market, and then makingnecessary changes in a timely way.The Cost Approach to PricingCommon mistakes of small businesses, homebasedas well as others, in this area include:• Costing materials at original prices rather thanat the cost of replacing them. Use replacementcosts in all financial work.• Not including salaries. Figure out how much itwould cost to hire someone to do what you aredoing. That is a business expense. Charge it asa business expense, even if payment toyourself has to be deferred.• Not including interest your money could haveearned if it had been invested, for example inCanada Savings Bonds, instead of in your78solutions for small business home-based business