The objectives of pricing should consider: Where manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaignsthen prices are likely to be higher. Price can act as a substitute for product quality, effective promotions, or an energetic selling effort by distributors in certain markets. In economic terms, it is a price that shifts most of the consumer economic surplus to the producer.
Keys to Success Data shows that four out of five new business ventures fail within the first five years. How to Write a Business Plan. For related reading, see: Planning, Strategy and Supply and Demand Before studying the microeconomics of starting a business, however, the entrepreneur should also be aware of the larger aspects of a start-up business.
The entrepreneur should also consider whether employees will be required, and the legal and insurance aspects of the business.
Starting a Small Business. Other major concern for start-up businesses are the vendors and suppliers required, the physical premises in which the business will be conducted, and the all-important financing.
Most importantly in starting a business, at least from a microeconomics perspective, is the supply-demand factor. Will there be enough demand for what the new business intends to supply?
That's a critical question, and if the answer is negative, the chances that the business will succeed are minimal. If your start-up business is positioned in a fast-growing market in which new consumers are created regularly — clothing for teens, for example, or products for college students, including the annual batch of freshmen — then demand for the product may also regularly increase.
But in any age-dependent category of product, for every new customer coming into the market, an older customer leaves the market, resulting in a market that remains approximately the same size overall, but with new buyers continually coming into it.
If the new business is a restaurant, for example, or some other form of retailing, a study of the location — the neighborhood where the business is to be located — should be conducted to determine if there's enough demand to sustain the business.
Know Your Competitors Although accurate, detailed information about your potential consumers and competitors may be difficult to obtain, first-hand observation of activity in your competitor's establishment, talking to potential customers and watching customer traffic and volume through the week and at various times of the day will give you a rough idea of what the new business may be up against.
Be sure to check out their online presence, including social media channels and their website. This "competitive intelligence" may also provide information about consumer desires and preferences — what they want that your potential competition is not providing.
Knowledge of your competition's pricing is also essential. A microeconomic theory called perfect competition refers to small businesses and start-ups where many small companies supply a single product or service. These businesses and their consumers are too small to influence the market price of what's being bought and sold, and so their prices are locked in.
But perfect competition seldom occurs, and even if it does, there are numerous ways to compete other than with price.
This necessity requires a comprehensive knowledge of the business, effective negotiating skills and judicious decision-making. A thorough knowledge of the business you're starting will reveal where costs may be cut or contained to yield bigger profit margins.
Judgment and Decision Making Effective negotiating skills will enable you to get the best prices from vendors and suppliers, and from lending institutions when negotiating the terms of your start-up financing. Judicious decision-making allows the start-up entrepreneur to maximize profits using the microeconomic formulas described in the previous chapters.
For a small start-up that intends to enter a business category already dominated by large, established players, the challenges can be overwhelming.
Large firms can buy from wholesalers at volume discount prices. They can negotiate with unions to reduce labor costs and benefits. Smaller firms — and especially small start-ups that come with a higher level of risk to the lenders and firms that provide credit — may not be able to borrow money or obtain credit from vendors at favorable terms.
What are Economies of Scale? Large, well-established firms also have institutional knowledge about their industry that the newcomer does not. The larger firms may also have greater cash reserves to weather market downturns and unforeseen problems that may compromise profitability. A small start-up will have few if any of the advantages cited above, and will therefore find it very difficult, if not impossible, to compete against large, dominant firms.
Unless an entrepreneur has a unique and effective means of battling these daunting odds against success, they would be well-advised to start a different category of business. The successful independent restaurant or diner offers unique elements to the consumer that are unobtainable at the majors.
These could be convenience of location, menu specialties and a wider variety of choices, a friendlier ambience, a higher quality product, or even competitive pricing.4) Fine-tune and adapt your general pricing policy in response to trends, industry practices and new innovative pricing strategies to help solidify your competitive position within the marketplace.
The business plan is a communications tool to inform and inﬂuence the reader towards some action – providing a loan, extending credit or investing in your business.
Your business plan provides some guideposts in running your. A list and explanation of different pricing strategies - predatory pricing, limit pricing, loss leaders, penetration pricing.
How this affects profits, . The Marketing Plan: Economics Facts about your industry: Explain your method(s) of setting process. For most small businesses, having the lowest price is not a good policy. It robs you of needed profit margin; customers may not care as much about Business Plan for Startup Business.
Commonly, in business plans, the pricing strategy has been to be the lowest price provider in the market. This approach comes from taking a quick view of competitors and assuming you can win business by having the lowest price.