Pricing Strategy in a Business Plan: Deep Dive
In this blog post, we’re diving into how to choose and explain your pricing strategy in your business plan. We’ll cover different pricing models like penetration, premium, and value-based. We’ll also dive into how to present your pricing strategy in your business plan.
Whether you’re starting a new business or preparing a business plan for an existing company, getting your pricing right is key to attracting customers and making a profit. Let’s break down how to make your pricing strategy clear and effective. Let’s dive in!
What are the different pricing strategies?
Different pricing strategies can significantly influence demand, profitability, and market positioning for businesses. Here’s an overview of some common pricing strategies:
- Cost-Plus Pricing: Adds a markup percentage to the cost of producing a product or delivering a service. It’s simple to calculate and ensures a profit margin.
- Value-Based Pricing: Sets prices based on the perceived value to the customer rather than the cost of production. This strategy focuses on the benefits and value the product or service brings to the customer.
- Competitive Pricing: Prices are set based on competitors’ pricing structures. Businesses might price their products slightly lower than competitors to gain market share or at a similar level to match the market rate.
- Penetration Pricing: Involves setting lower prices to enter a competitive market and attract customers quickly. The goal is to gain market share and then gradually increase prices.
- Premium Pricing: Setting the price of a product or service higher than the competitors. This strategy is used to signal superior quality or exclusivity to justify the higher cost.
- Dynamic Pricing: Adjusting prices in real-time based on market demand, competition, and other factors. Common in industries like hospitality and airlines.
- Freemium Pricing: Offering a basic product or service for free while charging for premium features. This strategy is often used by software and service companies to attract users.
- Bundle Pricing: Combining several products or services and selling them at a single price, often lower than the total cost of buying each item separately. This can increase the perceived value and encourage sales.
How to choose a pricing strategy
Here’s how to come up with an efficient pricing strategy:
Align Pricing with Market Strategy
Begin by articulating how your pricing strategy complements your overall market strategy. If you’re aiming for market penetration, explain how your pricing is designed to attract a large volume of customers by being more affordable than competitors.
For a premium pricing strategy, discuss the exceptional quality, exclusivity, or unique value your offerings bring, justifying higher price points.
If you’re adopting a value-based pricing model instead, illustrate how your pricing directly correlates with the perceived value to the customer, possibly through superior benefits or cost savings they provide.
Relate Pricing to the Target Market
Your pricing strategy should be closely tied to your understanding of your target market.
For instance, if your target market highly values sustainability and is willing to pay more for eco-friendly products, your pricing should reflect this. Similarly, if you’re targeting a price-sensitive segment, explain how your pricing strategy enables you to offer competitive value while maintaining profitability.
Consider the Competitive Landscape
A comprehensive pricing strategy also considers the competitive landscape. Analyze your competitors’ pricing and how your strategy positions you within this context.
Are you offering a more affordable alternative to premium products, or are you introducing a higher-quality option in a market segment dominated by low-cost competitors?
Discuss how your pricing strategy gives you a competitive edge, whether it’s by filling a gap in the market, offering better value, or challenging the status quo with innovative pricing models.
Where to include your prices in your business plan?
In your business plan, prices should be detailed under “Products or Services” within the Business Overview section of your business.
This part of the plan not only describes what you are offering but also provides an ideal opportunity to outline your pricing strategy and the specific prices or price ranges of your products or services.
Here, you can explain how your pricing fits into the market and aligns with your overall business strategy, giving potential investors or lenders a clear understanding of your approach to generating revenue.
Remember your pricing strategy should align with your financial projections (projected income statement, cash flow statement, and balance sheet). Indeed, you will need to give some high-level explanation of how you came up with these financial projections, based on your pricing strategy too.
