Adapted from content excerpted from the American Express® OPEN Small Business Network
Discuss what you will charge for your product or service and how you derived the price. For example, a luxury gift importing business sets prices not only to cover costs and make a profit but to position products as luxury items. A printing shop with a good location charges slightly more than its competition because it has a convenient location and it has determined that the market will bear the higher price.
Once you have briefly explained your pricing and rationale, discuss where this pricing strategy places you in the spectrum of the other providers of this product or service. Next, explain how your price will: get the product or service accepted, maintain and hopefully increase your market share in the face of competition, and produce profits.
- Investors are used to seeing (and rejecting) business plans in which an entrepreneur says the product or service they want to create will be higher in quality and lower in price than those of their competitors. This makes a bad impression because it's usually unrealistic. If you really do have a higher quality product, it will appear that you may plan to underprice it, and consequently undersell it.
- Costs tend to be underestimated. If you start out with low costs and low prices, you leave yourself with little room to maneuver, and price hikes will be difficult to implement.
- If you charge more than competitive existing products, you will need to justify the higher price on the basis of newness, quality, warranty, and/or service.
- If a price will be lower than that of an existing, competing, product or service, explain how you will maintain profitability. This may happen through more efficient manufacturing and distribution, lower labor costs, lower overhead, or lower material costs.
- Discuss how higher prices may reduce volume, but result in high gross profit.
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