Hot Tips for Starting A Small Business, Part 4

by: Monique Hawkins

One of the essential elements for a small business owner to assess before starting a small business is to understand their market. This is crucial and the data that is collected will one determine how to appropriately price their products and/or service.

Assessing a market helps small business owners define their goals, analyze their competition, and develop a unique selling proposition. Marketing research also assists in:

*creating a primary and alternative sales approaches to a given market,

* making profit projections from more accurate databases,

* organizing marketing activities,

* developing critical short- and mid-term sales goals and establishing the markets profit boundaries

There are specific questions that potential the small business owners should seek to answer while doing their research. These questions include:

* Who are the customers?

* Where are they located?

* What are their needs and resources?

* Is the service or product essential in their operations or activities?

* Can the customer afford the service or product?

* Where can a demand for the service or product or service be created?

* Can one compete effectively in price, quality and delivery?

* How many competitors provide the same service or product?

* What areas within the market are declining or growing?

Research on Competitors

Research on competitors is extremely important. Some ideal places to complete additional research on competitors include visiting industry trade shows to find out what competitors are selling and how they are market their products. Similarly, staying current on industry magazines and publications is helpful as well.

Marketing research is not something that ever stops. It should be an essential part of an overall marketing strategy and plan for any small business owner.

Pricing Products and Services

There are several pricing strategies one can select for a small business. The small business owner should use the approach that will make their good or service the most competitive and increase profits. Common pricing strategies are pricing below the competition, pricing above the competition, price lining, multiple pricing, and identifying cost factors and then pricing accordingly.

Pricing Above the Competition

This approach will reduce the profit margin for a sale. It requires the following:

* obtaining the best prices possible for raw materials or inventory,

* locating the business in an inexpensive area or facility,

* closely controlling the inventory,

* limiting product lines to fast-moving items,

* designing advertising to concentrate on price specials, and

* limiting non-essential services.

Pricing Above Competition

This strategy is possible when price is not the customer's greatest concern. Reasons to justify customers paying higher prices include: -

* service considerations, including delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, and helpful, friendly employees;

* a convenient or exclusive location; and

*exclusive merchandise.

Price Lining

This strategy focuses on carrying a product or service in a specific range. For example, a store may wish to attract customers willing to pay more than $50 for a purse. Price lining has certain advantages:

* ease of selection for customers, and

* reduced inventory and storage costs.

Multiple Pricing

This approach involves selling a number of units for a single price, for example, two items for $1.98. This is useful for low-cost consumer products, such as shampoo or toothpaste. Many stores find this an attractive pricing strategy for sales and year-end clearances.

Cost Factors and Pricing

Every component of a service or product has a different, specific cost. Many small businesses fail to analyze each component of their commodity's total cost, and therefore fail to make a good profit. Once an analysis is done, prices can be set to maximize profits and eliminate any unprofitable services.

Cost components include material, labor and overhead costs. Material costs are the costs of all materials found in the final product, such as the wood, glue and coverings used in manufacturing a chair.

Labor costs are the costs of the work that goes into manufacturing a product. An example would be the wages of all production-line workers producing a certain commodity. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include social security, workers' compensation, unemployment compensation, and insurance and retirement benefits.

Overhead costs are those not readily identifiable with a particular product. These costs include indirect materials, such as supplies, heat and light, depreciation, taxes, rent, advertising, transportation and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling and/or storage as well as other cost components. Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is also important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs semiannually; including increased executive salaries and other costs.

Understanding one's market and pricing products and services accordingly, is very important part of any small business and an area that should be assessed carefully. Completing this important step will help a small business have an edge over their competition and can help increase profits.

Copyright 2005 Monique Hawkins

About The Author

Monique Hawkins is the small business owner of the online music box store, "Monique's Music Box" located at http://www.my-music-box.com/. She enjoys sharing information with business owners that will help them attain success. For additional information about an opportunity for business owners to grow their business financially and strategically, visit: http://www.abrahampublishing.net/app/?af=274476/