Page 100 - Business Plans that Work A Guide for Small Business

Marketing Plan: Reaching the Customer • 91

service strategy, try to identify those attributes that have the potential to
be sustainable. What will the customer value over the long run?
You will need to consider other issues as well. Discuss why the customer
will switch to your product and how you will retain customers so that they
don’t switch to your competition in the future. This section should also ad-
dress how you will provide service to the customer. What type of technical
support will you provide? Will you offer warranties? What kind of product
upgrades will be available and when? It is important to detail all these ef-
forts, as they must all be accounted for in the pricing of the product. Many
times, entrepreneurs underestimate the costs of these services, which leads
to a drain on cash flow and can ultimately lead to bankruptcy.

Pricing Strategy

Determining how to price your product is always difficult. The two pri-
mary approaches are the “cost plus” approach and the “market demand”
approach. We advise entrepreneurs to avoid cost plus pricing. It is difficult
to accurately determine your actual cost, especially if this is a new venture
with a limited history. New ventures consistently underestimate the true
cost of developing their products. For example, how much did it really cost
to write that software? The cost would include salaries and payroll tax
burden, computer and other assets, overhead contribution, and so forth.
1
Since most entrepreneurs underestimate these costs, there is a tendency to
underprice the product. Another pricing strategy that gets entrepreneurs
in trouble is to offer a low price so that they can penetrate and gain market
share rapidly. There are problems with a low price: it may be difficult to
raise the price later, demand at that price may overwhelm your ability to
produce the product in sufficient volume, and it may unnecessarily strain
cash flow. Also, low price may connote lower value versus the competition.
Therefore, the better method is to canvass the market and determine an
appropriate price based upon what the competition is currently offering
and how your product is positioned. If you are offering a low-cost-value
product, price below market rates. If your product is of better quality or
has features superior to those of the competition (the more common case),
it should be priced at a premium to the competition.

1 The fluid nature of the start-up firm means that purchasing power, changing product
or service components, and even the offering itself make the real and total cost of a
product very difficult to pin down.