Category Entrepreneurship

Developing a Location Plan

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The importance of the location decision differs depending on the type of product or service provided by the business. For retail outlets location is the key. Service providers such as hair salons and shoe repairs services also largely depend on the location to drive traffic to their stores. Location is also important to manufacturers who need to be in proximity to the suppliers. However, if it is small manufacturing business which does not have to be in proximity to suppliers and which sells its products over the internet than location may be not very important. The costs of securing good locations increased significantly over the last decade. However, the internet allows many businesses to establish proximity to customers at a very low cost.

Factors to consider when selecting a business location

Selection of location is often a once-off decision. Relocation is usually very costly and time consuming but sometimes is necessary if the choice of location was incorrect.

The importance of location differs depending on the type of product or service provided by the business. However, there are number of important factors that should be considered by entrepreneurs when selecting a location for the business. Depending on particular business and situation, each factor may be more or less important but all of them should be considered.

The first factor that should be considered is proximity to customers. The importance of proximity to customers depends on the type of product of service provided by the enterprise. For retail outlets location is the key. Service providers such as hair salons and shoe repairs services also largely depend on the location to drive traffic to their stores. However, if it is small manufacturing business which sells its products only over the internet than proximity to customers is not very important, if important at all.

Site-selection software can be used by businesses to help select a location with good proximity to customers. Such software is relatively sophisticated and allows evaluating such information as demographic information, traffic flow and businesses which are located in the area when choosing a location with good proximity to customers.

Proximity to customers is also a very important consideration when businesses supply product which is very expensive to ship, especially if shipping costs are high compared to the value of the product, such as soft drinks. Such businesses need to be located as near to customers as possible to decrease shipment costs.

An internet presence allows good customer accessibility to many types of businesses and should be considered.

Proximity to employees is also very important. Business need to be located in the area where employees of the right calibre, skills set and education are available. Requirements that business have to employees depends on the type of the business and may include wage rates levels, history of relationships between employees and employers in the area, general labour productivity in the area, certain type of skills and availability of surplus labour which refers to the situation when supply of labour is higher than demand and therefore many workers are searching for a job.

Proximity to suppliers is also can be important consideration. For example, it may be very important for a manufacturing business to be close to the raw materials’ supplier. In this case, the cost of shipment or the need to maintain close relationships may be critical.

Proximity superior transportation facilities: Availability of transportation is also very important. For example, a retail store may require a good highway, roads and public transport services nearby to ensure that customers can access the store. For manufacturing businesses it may be important to ensure that good roads are available to transport its products. When considering cost of the location it is also important to consider whether target customers will be able to afford this location. For example, the cost of parking and transportation to access the business location should be considered.

Cost of te location is also an important factor. Generally, it is better for new businesses to first rent a location. This allows business to refine its understanding of its location needs before purchasing a location as well as saving its available funds for necessary operating expenses.

Leasing also reduces risk as it means businesses will have less debt. Risk rises as the debt of the business increases because businesses can be forced into bankruptcy by lenders if debt obligations in terms of interest and principal payments on debt cannot be met. Since sales and other income sources of the new business are usually uncertain during establishment phase of the business, it is much less risky not to have large debt obligations.

If the leasing option is selected, it is important to ensure the insurance policy is adequate for the business’s needs and it does not expose the business to unnecessary risks due to confusing clauses. It is advisable to have an attorney to review the agreement before signing it.

When considering cost of the location it is also worthwhile to consider taxes. Some areas of the country may offer lower tax rates and this could be very helpful for a new business.

If entrepreneurs have very limited funds, and if type of product or service permits, it may be a good idea to initially locate the business on the internet and operate it from home. This will significantly decrease the operational costs required to start a business.

Facility requirements are also important to consider. Entrepreneurs need to consider if the business has any particular facility requirements such as high power consumption.

Competition is another factor to consider when selecting location. For example, if the business is a coffee shop than selecting a location where there are no other coffee shops are currently located can be advantageous, especially in the start-up phase.

Specifics of the community must be understood. It is important to investigate the community in the locations considered. Entrepreneur can do research at almost no cost by reading local press, watching local television, speaking to other business owners in the area and understanding the background of the area.

Entrepreneur’s preferences are another factor that must be considered when choosing a location for the business. Many entrepreneurs give this factor the most attention. Entrepreneur may wish to locate business in the area in which he/she is a resident of and which he or she knows well.

This can have many advantages such as better understanding of the target customers, including their needs and preferences. Other advantages include established relationship that can be utilized for the benefit of the business. An example of this could be a relationship with the local bank manager which can be helpful in obtaining a loan. Another example is the relationship with other business owners which can be helpful in obtaining general advice and guidance.

Entrepreneur’s family and friends may be the first customers of the business and may recommend businesses to other people, which would make it easier to jump start sales of the business.

Entrepreneurs also may choose the location they are comfortable with due to the specific life style that they wish to maintain. For example, certain individuals may prefer to live near the ocean and would want to locate the business in such an area.

However, it is vital to keep in mind all other important factors that must be considered when choosing a location and do not allow just personal requirements to be a sole reason for locating in the specific area.

Entrepreneurs may even consider locating at home. This has a number of advantages such as lower costs, saving time that could be spent on the commute and ability to spend more time with the family. Entrepreneurs, however, need to consider if it will be possible to maintain a professional image by being located at home. Establishing special and non-special boundaries may help to achieve this. It also needs to be considered if the city in which entrepreneur resides allows to locate this particular type of business at home in this area and if there are any restrictions on activities of the business that apply in case.

Prestige of the location will be more important for some types of businesses. For example, if business targets an elite customer than prestige of the location is an important consideration.

Entrepreneurs should also consider sharing facilities with other business. Business incubators offer facilities for the new businesses. Such facilities usually allow new business to become operational right away. Business incubators generally provide businesses with building space, clerical assistance, general equipment such as phones and fax machines and management advice. Such choice will result in lowering operational costs and therefore decrease the risk of business failure due to insufficient funds.

Generally such business incubators are sponsored by governments or universities and their purpose is to help new businesses get established before such businesses become strong enough to move to their own locations. The main benefit of business incubators is management advice that they provide. This could be especially beneficial to inexperienced entrepreneurs.

Other considerations when choosing a location is economic and (business) environmental factors. This refers to such factors as tax structure, legal requirements, crime levels and weather. Safety is an important consideration when choosing a location. Therefore, location at a high crime rate area may not be very suitable, especially if this is a type of business where customers will need to visit the location.

Some areas of the country may offer location incentives such as enterprise zones. Enterprise zones are established to entice businesses to locate in the areas which are economically deprived and in need of job creating by offering businesses lower taxes.

However, many cities also place certain restrictions on businesses. For example, it is common for cities to have zoning requirements which place restrictions on businesses which operate from home. This is a problem especially over the last few years since more and more businesses consider locating at home and home based business are no longer considered to be “second grade” businesses in the eyes of both consumers, business partners and owners.

 

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What investors are looking for in a business plan?

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Focus on why venture may fail. When investors consider a business venture they focus on why this particular new business venture may fail. This is in comparison to the perspective of the entrepreneur who focuses mainly on why this particular venture will succeed.

Main concerns of investors: It is important to clearly address areas that investors are looking for first and foremost. This includes whether the product or service will be accepted by the market as well as potential demand for the product or service. The calibre of the management team and critical risks are also of vital importance to prospective investors. Investors also look for honesty and transparency in the way information is presented to them.

Short, simple and to the point: Investors receive a lot of business plans. Therefore, generally, investors will spend only five minutes briefly looking through the business plan to determine whether this particular plan deserves more time investment for exploration.

Investors usually briefly consider new business opportunity by the reading executive summary or by listening to in-person presentations by entrepreneurs. If within five minutes the opportunity does not seem to be promising, investors will likely to move on to another opportunity.

Therefore, it is vital to be well prepared. An executive summary must highlight all important details why this opportunity is promising. Presentations by the entrepreneur should be concise, to the point and first focus on what investor is most interested.

Value credibility: When an opportunity is presented to an investor in person or via a business plan, the fact whether the investor feels he or she can believe entrepreneur or not will play an important role.

Perceived credibility of an entrepreneur influences the interest of the investor. If the investor will not believe an entrepreneur’s claims and will see entrepreneur as not being trustworthy, the investor most likely will not do business with such an entrepreneur even if the opportunity is promising. Therefore, it is imperative to provide factual support for any claims made in the presentation to the investor, verbally or in writing. The plan should include realistic sales projections and profit margins which are aligned with average figures for the industry, with the exception where the opposite can be factually supported.

High level of preparation: Investors want to see the entrepreneur thoroughly researched the opportunity and considered all important areas.

Value passion: Investors look for passionate entrepreneurs. Investors often invest in entrepreneurs and the management team rather than the business opportunity itself.

After investing: After an investor provides funds to help establish a new business venture, it is imperative to act with integrity and follow through the business plan as agreed at the commencement of the relationship between an entrepreneur and investor. Furthermore, an entrepreneur should monitor actual performance against performance standards and milestones to ensure that he or she stays on track. In building relationship with the investor, it is advisable to follow the simple rule of under promising and over delivering instead of the opposite, which is more customary. Also, the entrepreneur can only control what he or she can control. However, as long as the entrepreneur remains true to his or her word and acts with integrity – natural setbacks and troubles should not be a problem with investors as they usually understand that in the turbulent start-up enviornment setbacks and troubles are inevitable.

 

External sources for financing Pearlparadise.com

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Let’s use Portia as an ongoing example. Portia can consider using external financing, which refers to funds invested by outside investors and lenders. External financing is divided into equity and debt financing. Portia can either borrow money with the agreement to repay the borrowed sum plus interest or can obtain funds in exchange for equity, or use a combination of equity and debt financing.

Portia can consider debt as a source of external financing. Debt financing increases her financial risk because debt must be repaid regardless of whether or not the firm makes a profit. If debt is not repaid according to an agreed upon schedule, creditors may even force the enterprise into bankruptcy. Alternatively, equity investors are not entitled to more than what is earned by the enterprise.

When borrowing from the bank, an entrepreneur has number of options. The following types of loans are generally available:

Lines of credit – this is when bank agrees to make money available to the business. Agreement is made for up to a certain amount and is not guaranteed, but only in place if the bank has sufficient funds available. Such agreement is generally made for a period of 1 year.

Revolving credit agreement – this is similar to the lines of credit but the amount is guaranteed by the bank. A commitment fee of less than 1% of the unused balance is generally charged. Therefore, such arrangement is generally more expensive for the borrower.

Term loans – such loans are generally used for the financing of equipment. The loan is generally corresponds to the useful life of the equipment.

Mortgages – such loans are long-term loans and are available for purchase of the property which is used as collateral for the loan.

Portia can also consider equity financing. Private equity investors include venture capital firms and business angels. Venture capital firms raise a fund and then select portfolio of businesses in which to invest. Portfolios generally include start ups and existing businesses.

In exchange for investment, venture capital firms obtain partial ownership of the business. Convertible preferred stock or convertible debt is usually preferred. This is because the venture capital firm would like to have the senior claim on assets in case of liquidation but still wants to have an option to convert it to common stock if the business becomes successful.

Business angels, which are also referred to as informal venture capital, are wealthy private individuals who invest in the firms in their individual capacity. A very small percentage of start ups manage to get such funding. Therefore, entrepreneurs should have other options available as well.

There are also government supported financing options available to Portia which are specific to Portia’s location.

Further, Portia can use personal sources of funds. The “personal” sources could be personal savings, credit cards, borrowing from friends and relatives or any other way of obtaining money such as selling an asset, such as a car or a summer house, to free up funds for investment in the enterprise.

Personal savings are usually the leading source of “personal” funds. Credit cards are often used but needed to be used with extreme caution as interest rates on outstanding amounts can be incredibly high.

Borrowing from friends and family is also very tricky and should be done with extreme care. If Portia’s business fails or does not perform as expected and money is not repaid when agreed than it can destroy or severely damage relationships. When borrowing from friends and family, it is a good guideline to ensure that it is seen as an investment rather than a gift by the lending side of the transaction. An agreed upon deal should be put in writing since memory is not always reliable. Moreover, the amount borrowed should be repaid as soon as possible.

Overall, Portia has a number of the sources of external financing to choose from. Portia needs to evaluate upsides and downsides of each option and consider all options in light of the unique situation of the business to choose the best option or combination of options.

 

The 4 Ps of Marketing Mix

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The term marketing mix was first used in 1953 by Neil H. Borden in his presidential address of the American Marketing Association and later in his article entitled “The concept of the marketing mix”.

In 1960, a well-known marketer E.J. McCarthy categorized elements of the marketing mix proposed by Neil H. Borden into four main categories. According to E.J. McCarthy, marketing mix consists of four main elements:

  1. product
  2. place (distribution)
  3. promotion
  4. price

These elements commonly called 4Ps of marketing mix.

Maximizing performance of the marketing mix is what marketing as a function of organization focuses on. Of course, the ultimate objective of managing the 4 Ps marketing mix is the same as of any other action of the organization, to increase the wealth of the shareholders of the enterprise.

The 4Ps of the marketing mix

Product – Product, as an element of marketing mix, refers to products and services produced by companies for consumption by the population. Various marketing decisions have to be made concerning the product element of the marketing mix. Such decisions include decisions on packaging of the product, branding of the product or service, and on the product warranty.

Place (distribution) – Place (distribution), as an element of marketing mix, refers making products and services available for the customer. It also refers to the site where the product or service is made available to customers. Management of place as an element of the marketing mix includes various vital decisions such as decisions regarding the distribution channel and inventory management.

Promotion – Promotion, as an element of marketing mix, incorporates everything that companies do to attract customers to its products and services. Management of promotion, as an element of marketing mix, includes management of the “promotional mix” which consists of sales promotion, advertising, sponsorships, direct marketing, personal selling and public relations (publicity).

Price – Price, the last of the 4 Ps, refers to the amount, in monetary terms, that the producer requires from consumer in order to part with the ownership of or ability to use the product or service which is offered for sale. One of the key elements of the marketing mix is pricing strategy.

 

Growth of a Small Business

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Entrepreneurs have different preferences towards the growth of their businesses. Some desire rapid growth, others pursue manageable and reasonable growth while others prefer not to grow their businesses at all but only to maintain the current size of the business.

Growth of a small business can be incredibly challenging if it is not planned for. One of the reasons for this is due to the fact that growth usually requires additional financing which has to be obtained before the additional profits appear as cash inflows.

This growth problem is further exacerbated due to the difficulty of obtaining external financing. Business may need additional financing to hire more personnel to handle increased sales and to buy extra inventory and raw materials. Therefore, the situation may occur where a rapidly growing business is profitable but has cash-flow problems. This is referred to as a “growth trap”.

 

Distribution, distribution channels and distributors

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One of the important sub-concepts in supply chain management (SCM) is distribution. Distribution is also one of the four Ps of the marketing mix. The four Ps of the marketing mix are product, price, place (distribution) and promotion. After the product is manufactured or service produced is ready for consumption – it has to be distributed.

Distribution describes the activity of distributing products or services from producer to the final consumer.

Distributors, which are also called intermediaries, assist in the distribution of products or services to the final consumer. Examples of distributors of products could be an agent, wholesaler or retailer. An example of distributors of services could be an employment agency which distributes the labour of job seekers to employers.

Some distributors take a title and are called merchant middlemen. Examples of merchant middlemen include wholesalers and retailers. Those distributors who do not take a title are called middlemen (as well as brokers and agents). An, example of a middleman is an insurance broker.

Distribution channels

There can be direct or indirect distribution channels:

A Direct distribution channel does not involve the help of an intermediary (distributor). In the case of a direct distribution channel, the product or service is distributed directly from the producer to the final consumer. An example of direct distribution channels is the case when an organization distributes its products directly from its website.

Indirect distribution channels involve the help of an intermediary (distributor) which acts as a middleman between the producer and final consumer. There can be one or more levels of distributors between the producer and final consumer. For example, the product can be distributed to an agent who in turn distributes it to the wholesaler who in turn distributes it to a retailer. The final customer buys product from the retailer. In this case there are three levels of distributors between the producer and final consumer.

If the company uses a combination of distribution channels it is called dual distribution. An example of dual distribution occurs when the company offers its products directly from its website (direct distribution channel) as well as via local retailers (indirect distribution channel). Dual distribution may allow the company to achieve higher profitability.

There are various factors that must be considered in selecting a distribution channel. Those factors include: nature of the product, strategies followed by competitors, availability and reliability of intermediaries, customer preferences and characteristics, cost of involving intermediaries, size of the business (capacity to deal with a large intermediary such as a national retailer) and warranties (capacity to offer warranties that may be demanded by the intermediary).

Disadvantages of using intermediaries include a generally higher price to consumers, lower degree of control over level of customer service provided to the final consumer, reliance of eagerness of intermediary to promote the product and lower degree of communication between producer and consumer.

Advantages of using intermediaries include the fact that, especially for small businesses, it may be much cheaper to use an established distribution infrastructure than to create its own (intermediaries specialize in distribution activities and can usually execute such activities more cheaply than the producer of the product). Some of the costs and activities such as storage and promotion are undertaken by the intermediary so the business can focus on its core competency – producing the product, and some of the business risk may be overtaken by merchant middlemen.

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Supply Chain Management

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Supply chain refers to the network of organizations linked by movement of goods through various stages of production, storage and delivery until it becomes available to the final consumer.

Supply chain management (SCM) is a step by step integrated and coordinated process of movement of goods from raw materials stage all the way to the final product which is distributed to the final customer.

Supply chain management consists of three main flows which are product flows, financial flows and information flows. Product flow refers to the flow of products through the supply chain process. For example, products can move from raw material form to manufacturer to wholesaler to retailer and eventually to the final consumer. Financial flow refers to financial matters concerning purchasing and sale of products such as credit terms and payment schedules. Information flow refers to flow of information with regards to purchase and sale of products which move throughout the supply chain management process.

Within the strategic management process (SCM), management decision making and activities are usually grouped into strategic, tactical, and operational levels.

Strategic level – At the strategic level, a “big picture,” high level and long-term decisions with regards to supply chain management (SCM) are made in relation to the organization as a whole. Such decisions may include allocation of resources, consideration of partnerships and consideration of product life cycle (PLS) management.

Tactical level – At the tactical level, medium-term decisions are made on the subject of supply chain management (SCM) of the business. Such decisions may be on matters with regards to inventory, production and transportation.

Operational level – At the operational level, day-to-day short-term decisions are made with regards to supply chain management (SCM) of the enterprise. Operational level decisions may concern matters such as daily delivery and production.

The distinction between tactical and operational level decisions is often vague within organizations. This occurs because to meet daily orders (which occur at an operational level) organizations need to allocate resources (which occurs at the tactical level). Therefore, as with any other framework, various levels of decision making provide guidance for effective supply chain management (SMC) which should be supplemented with common sense and intuitive guidance.

There are numerous supply chain management software available, which significantly simplify supply chain management within organizations. Furthermore, the Internet has made communication within supply chain much more easier and faster compared to pre-Internet times.

Effective supply chain management (SCM) can decrease costs associated with supply management activities such as transportation, storage and packaging costs. This can contribute to obtaining  a competitive advantage over peers.

 

Product Life Cycle (PLC)

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The only way an organization can continue its existence and growth is by rejuvenating its product mix. This is important because products go through the product life cycle.

Product Life Cycle (PLC)

The idea of a product life cycle (PLC) was introduced by Theodore Levitt in his Harvard Business Review article entitled “Exploit the Product Life Cycle” which was published in November of 1965. Product life cycle is based on the biological life cycle and starts with introduction of the product (introductory stage) which is followed by growth and maturity stages and eventually decline stage.

The duration of the product life cycle depends on the product and can range from few months to few decades and beyond. Understanding of the product life cycle (PLC) assists management in enhanced understanding of what they can expect with regards to product performance based on where it is in the product life cycle and in developing appropriate strategies. Organizations need to ideally introduce new products before the old product reaches its peak stage.

In terms of profits and losses from new products, at the beginning of the introductory phase a loss is usually made. Then, at some point during introductory stage break even occurs. After break even profits generally rise up until its peak which occurs approximately close to the end of the growth stage which is followed by decline in profits.

Organization’s marketing, financial, human resource, purchasing and manufacturing strategies for the product should reflect the stage of the product in the product life cycle.

Stages of Product life cycle

Introductory stage – During this stage a product is developed and introduced to potential customers. Awareness about the product should be created and the market needs to be established. Marketing communication usually focuses on educating potential customers about the new product. If relevant, intellectual property protection should be obtained.

During beginning of the introductory stages losses are usually incurred. This occurs for a number of reasons such as the high costs of advertising involved in introducing a product to the market as well as the high costs of actual development of the product. Then, at some point during the introductory stage, break even occurs. After that point the firm starts making small but increasing profits. E-conferencing is an example of a product in the introductory stage.

Growth stage – Growth stages are characterised by rapid growth in sales and profits. If economies of scale are possible then profits are further accelerated. This is the stage when a company usually invests substantial economic resources to promote the new product and build the brand. Competition in the growth stage is drawn to the market. Market shares of market players tend to stabilize at this stage. Profits continue to rise up until its peak which generally occurs close to the end of the growth stage. This is usually followed by declining profits. Email is an example of a product in the growth stage.

Maturity stage – Maturity stage characterised by acutely increased competition. Intense competition may lead to price wars and concentrated attempts of rivals to differentiate its products. Companies experience decreased margins and some leave the market. Profits of a company generally continue its decline in the maturity stage. However, overall profits of the market for this particular product tend to be the highest at this stage of the product life cycle; although it is heavily splintered amongst many medium size to small players. There are usually 1 or 2 market dominant companies. Credit cards are an example of a product in the maturity stage.

Decline (saturation) stage – At the saturation stage consumers’ interest in the product dramatically declines. This can happen due to the introduction of more superior products to the market or changed consumer tastes.

Profits continue its decline in the saturation stage until profits reach zero (break-even point). The company may try to prolong this stage by finding ways to cut costs. Companies may also try to rejuvenate products by adding new features and looking for other ways in which product can meet customers’ needs. Markets itself tend to shrink at this stage. Eventually the product is withdrawn from the market. Typewriters are an example of a product in the saturation stage.

In conclusion, it is important to note that not all products will go through each stage of the product life cycle. Some products, for example, may experience the decline stage right after the introduction stage. Therefore, product life cycle (PLC) is a useful formal framework which can be used. However, common sense and intuition should also be applied in making product life cycle decisions.

 

Pricing Strategies

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The main objective of any enterprise is to maximize wealth of its shareholders. All decisions that are made for the organization should be based taking this objective into account.

Pricing strategy should also be aligned with the main objective of the enterprise. Further, in determining the pricing strategy, the goal should be to select prices which will allow achieving the highest profitability, which is determined by sales level and profit margin. Therefore, organizations should target attainment of the highest feasible profit margin at the highest sales level. A trade-off needs to be made between highest margins at lower sales against lower margin against highest sales.

There are various pricing strategies that can be considered in determining the most appropriate price for the product or service. Some strategies are presented below.

Skimming (skim, creaming) pricing strategy

A skimming (skim, creaming) pricing strategy refers to setting a very high price (with a high profit margin) for a limited period. It refers to “skimming the cream” from the market. Skimming pricing strategy may be possible when businesses have no or very few competitors. When competition will become more intense, business can lower its prices to more competitive levels. The skimming pricing strategy is often selected if investment costs must be quickly recovered and if there is no or very limited competition.

Remember the early days of the internet. People paid to have email accounts. Prices then tumbled as competition increased until email is now free.

Prestige (premium) pricing strategy

Prestige pricing strategy, which is also referred to as premium pricing consists of charging a very high price on a permanent basis throughout the entire product life cycle. Such a strategy is only possible for unique and high quality products or services in situations whereby an entrepreneur has a very strong competitive advantage. It is relevant when targeting an elite target market. This is because customers with high income levels have more inelastic demand (lower sensitivity to price and greater sensitivity to value provided by product or service). Moreover, taking psychological effects into account, very high price of a product may be part of the reason elite customers buy the product as high prices may evoke perceptions of additional “status”, “prestige” and “quality” value added to the product.

Variable pricing strategy

Majority of businesses charge a fixed price, which refers to situation whereby standardized price is charged for the product or service. However, sometimes business can use variable pricing strategy, a form of price discrimination. Under variable pricing strategy, business offers different prices to different customers based on factors such as customers’ bargaining power and quantities purchased.

In the case of a variable pricing strategy, a consistent price generally should not be promoted to allow for the price to vary. In other cases, standardized prices may be promoted and concessions may be granted to specific customers based on the factors such as customer knowledge, quantity purchased and bargaining power. However, it should be noted that some experts strongly advise against variable pricing strategy as they believe it diminishes the value of the brand.

Certainly, in some situations, variable pricing is more adequate than in others. For example, variable pricing may work for consulting work when different clients are charged different price for similar service based on number of factors. However, variable pricing may be damaging for the soft drinks’ brand.

Sometimes a dynamic pricing strategy is followed, which is a variation of the variable pricing strategy. Under a dynamic pricing strategy, price is determined for each customer separately based on such factors as customer’s financial position, past purchases history, where the customer lives and extent of eagerness to buy a product or service. Dynamic pricing strategy is possible due to advances in information technology and mainly used by internet based companies. Dynamic pricing strategy is also widely used by the airline industry.

Psychological pricing strategy

Psychological pricing strategy refers to situations where businesses take psychological effects into account when setting the price. For example, price set at $7.99 or $9.95 will have a psychological effect of being perceived as smaller than $8 and $10.

Penetration pricing

Penetration pricing strategy refers to setting prices below long-term market prices. This is especially relevant if the business has lower costs than competitors and therefore can afford to offer lower prices while maintaining adequate profit margins. This pricing strategy is also more appropriate for types of products and services which are demand elastic.

When price is set below the long-term market price to discourage new competitors from entering the market, this is called a pre-emptive pricing strategy. Further, when the lowest possible price is set, often one that does not cover the costs of production, to drive away competitors and to discourage new competitors, such pricing strategy is referred to as an extinction pricing strategy. Under pre-emptive and extinction pricing strategies, business often try to create an impression that penetration pricing is actually a long-term market pricing. In reality, when competitors leave the market, the business will increase prices back to profitable levels.

Product Line (price lining) pricing strategy

Product line (price lining) pricing strategy refers to businesses which offer lines of similar product at different prices. An example can be a line of shampoos by the same producer at $10, $15 and $25. Each subsequent product claimed to be more advanced. Such assortments make it easier for customers to select an appropriate product which most adequately meets needs of the customers.

Leader pricing strategy

Leader pricing strategy, which is also called follow-the-leader pricing strategy, refers to situation whereby business follows the price level of the dominant competitor. Leader pricing strategy is relevant for markets where intense competition is predominant. The leading competitor is usually a large firm with lower costs due to economies of scale. Therefore, following this strategy may significantly decrease profit margin of a small business. In such case, it is more advantageous for small business to differentiate its product from the dominant competitor and offer it at a price which is sustainable for a small business.

Mark-up pricing strategy

Mark-up pricing strategy consists of adding a certain percentage, possibly based on industry average, to the cost of the product. Percentage of cost is determined as follows:

Mark-up as a percentage of cost = Mark-up/Cost * 100

It is important to ensure that the mark-up incorporates profit margin and all anticipated relevant costs such as operating costs, future price reductions and discounts. Different mark-ups can be used for different products and services.

Pricing-at-what-the-market-will-bear pricing strategy

Pricing at what the market will bear refers to the setting of the maximum prices at which customers still will buy the product or service. This is only feasible if the business has no or limited competition and if the product is really unique.

For example, if the business has no competitors and products have no substitutes than customers may continue to purchase the product or service at a very high price since no other alternatives to obtain this product or service exist, or a substitute for this product or service is unavailable.

Manufacturer suggested retail price (MSRP)

According to this pricing strategy, retailer charges a price suggested by manufacturer. This can be advantageous in avoiding price wars with other retailers.

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Competitive Advantage

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Competitive advantage refers to quality that makes product or service more valuable and unique in some way compared to similar products and services offered by competitors. Sustainable competitive advantage is competitive advantage which competitors cannot easily copy.

Competitive advantage may be increased by improving value that product or service adds to customers. Increased value can be achieved by improving the total product offering such as improving delivery time, customer service levels, how fast quotations are provided and how customer is treated if the need for return or exchange arises. Below are some examples of a competitive advantage:

Google:

  • It is a dedicated search site.
  • A clean and simple interface which can load very quickly.
  • The ability to manage searches in multiple languages.

Apple:

  • All Apple products are tightly integrated and work very well together.
  • The brand is known for exceptional design and usability.
  • Easy to use, simple, light, compact and accessible.