Marketing addresses the four “Ps” of your business: product, price, promotion and place. The combination, or mix, of these elements will define your marketing strategy. In earlier sections of your business plan, you already described the benefits of your flash of cash, and how they will meet the needs of your target customers. Here you learn to will price your flash of cash benefits, how you will promote them, and how you will deliver them to your customers.
Once you have established how your product and service benefits will satisfy a prospect’s needs, such as being the most economical, the fastest, or the most entertaining, you must consider an appropriate pricing strategy for these benefits. Pricing, especially for small or startup businesses, can lead to its success or failure. After all, pricing will determine the level of profits for your business, and ultimately whether it will remain solvent in the years to come.
In order to communicate your flash of cash benefits to your potential customers, you will need to develop a promotion and advertising strategy. This strategy involves the creation of a message that stresses your product and service benefits for your potential customers. It also takes into account the most appropriate forms of media communication, such as social media, online advertising and printed communications and establishes a budget for advertising expenses.
The last P in the four “Ps” of marketing stands for place. Place, or your channels of distribution, describe where and how your customers will actually take possession of your products or services. If your business involves retailing you will want to describe the location and layout of your store. If you are a direct marketer, you will want to describe your methods of transportation for delivering your products. If your business involves face-to-face selling, you will want to describe your salesforce.
Effective marketing is expensive, particularly if you have to pay rent, hire a direct salesforce, or do a substantial amount of advertising. Therefore it is important that you develop a realistic budget for these expenses, and incorporate them into your financial management plan.
Why you shouldn’t use the “lowball” pricing strategy
Are you familiar with the term red flag? This is a term that the Internal Revenue Service (IRS) often uses when reviewing a tax return that seems unrealistic. Red flags lead to audits, which can lead to penalties, and sometimes even jail. If you would like to raise a red flag in your business plan, just say that your pricing strategy, and maybe even whole marketing strategy, is based on having lower prices than your competition. Upon seeing this strategy, potential investors will probably run for the door and start evaluating their next opportunity.
Why is the low-price strategy unappealing to investors? Lower prices are associated with lower profits that cannot be made up with additional volume. The best place to get examples of this is the stock market. Watch a company’s stock after it announces an “across-the-board-price-cut.” Barring other factors, its stock price always moves lower. Usually the converse is also true. When a company announces a price increase, its stock price rises. The recent announcement from Netflix that it was raising monthly access prices to $9.99 per month was complemented with a big jump in its stock price.
If you are saying to yourself “this doesn’t apply to me because I’m not a big company and don’t ever plan to have any stockholders,” then you are in for a big disappointment. Not only does this apply to your company, it is even more important since you do not have the financial resources of the larger publicly traded companies. As shown in the following table, look at what happens to your profits when you try to become the low-price supplier.
Although you only lowered prices by 5%, to be priced less than the competition, profits were reduced 50%! In order to get your profits back up to $10, you will now have to double your sales to $190. No easy task. That is why it is often said that price decreases “flow directly through to your bottom line.”
The price you charge for your flash of cash includes not only your expenses and profits, but also intangibles such as service level, warranties, image and quality. All of these factors are tied together in the mind of the consumer when making a purchase decision. In a perfect world, you could assign values to these intangibles and set the price accordingly. Unfortunately, consumers can be unpredictable and a high value for one consumer can be irrelevant to another.
Pricing strategies for your flash of cash
There are a wide range of techniques you can use to set prices, and each has its advantages and disadvantages. In order to maximize profits, it is important that you choose the right method.
In an ideal world we would all use cost-plus to set our prices. With this method you simply set prices to cover your fixed and variable costs, and leave enough room for profits. Unfortunately, most customers don’t care about your costs (the US Government excluded), and would rather get a lower price than see you make a lot of profit. Although you cannot realistically use cost-plus to set prices, you want to make sure that the aggregate prices you charge cover costs and provide for a profit.
Most markets that you have considered entering have some established pricing. Competitive pricing compares alternative products and services and sets prices accordingly. For example, the following are comparative prices for smartphones.
From this table, you can see that the smartphone with the least amount of features has the lowest price (excluding Apple which get a much higher premium for brand recognition). However, there is not quite as much distinction between the two most expensive smartphones. While the Samsung Galaxy 6 does offer 2.1 GHz CPU speed and 23 hours of battery life, its display is smaller than the LG G4.
By using competitive pricing, you can establish price ranges for your flash of cash. Additionally, you can compare features, warranties and service levels to determine premium and discount levels relative to competing products and services.
Can you think of a business where you receive you receive the same utility (an economics term meaning usefulness received by consumers), but at greatly differing prices? The lodging industry comes to mind. Most hotels give you a bed to sleep in at night and have a shower for the morning, yet the prices charged for this utility can differ by 100%, or more. Through a well implemented strategy of higher service levels and image building, some hotels are able to obtain premium prices over their competitors.
Some of the ways that other businesses are able to achieve premium prices include:
- Restaurants: higher quality food
- Hotels: better service levels
- Automobiles: superior performance
- Retail outlets: extended warranties
- Apparel stores: latest fashions
If you are thinking of pursuing a premium pricing strategy, there are three key points to keep in mind: customers must perceive the value of your premium service; be willing to pay for it; and it must cost you less that the price you receive. To the last point, “do not offer gold plated service if you are only going to receive silver plated prices.”
Cream skimming pricing
Cream skimming is another pricing strategy that is used extensively in the high-tech markets. When a manufacturer introduces a new product, the price is initially set at a high level. Over time, as the new product becomes more widely accepted, the price is gradually reduced. Again the cell phone market offers an excellent example. As every new generation of faster phone is brought to market, prices of the older phones are gradually reduced to make them more widely available. This allows the manufacturer to recover its development costs at the beginning of the sales cycle.
This strategy can work well in markets where the product or service is truly new or innovative, since it is always easier to lower prices than to raise them. In any market, you will find customers that want to be the “first on the block” with the latest product or service, and are willing to pay a premium for it (like Apple). These consumers are called “early adopters.” Since early adopters are price insensitive, you can use them to your advantage by initially setting prices at a high level, and then lowering them over time to increase your market share. Consider a new restaurant in town that has a line outside its door. The proprietor of this new restaurant could certainly deploy a cream skimming strategy, and charge higher prices until the line shortens.
Market penetration pricing
This is the strategy of setting prices low, or below the competition, initially to attract new customers. As stated at the beginning of this section, if you are planning to deploy this strategy, you will be raising a red-flag for your potential investors or management. Pricing lower than the current market indicates that the most important benefit you have is low prices! Also, keep in mind that a plan to raise prices after an introductory period is difficult, since it is always easier to lower prices than to raise them.
Promotion and advertising
Once you have identified your product and service benefits and created a pricing strategy, it’s time to develop an advertising and promotional campaign for your target customers. You must consider the following for your campaign:
- What message do I want to convey to my prospects and customers?
- What type of advertising media is most appropriate for my business?
- How much can I afford to spend on my advertising?
Prior to answering these questions, it is important to remember that your advertising should be directed at your target market and that it must be continuous to be effective. If you have adequately identified your target market, then you should have little difficulty reaching your prospects using cost effective media. Consider a software vendor that sells accounting and productivity applications to manufacturing businesses. Appropriate advertising media for this vendor might include: banner ads on computer oriented websites, direct mailings; and participating in trade shows. Also, this vendor might plan to visit the same two trade shows every year, and conduct direct mailings to the same individuals every quarter.
Your publicity and promotion should gradually change the awareness level of prospective customers about your flash of cash. Remember your first day of school or college, when you didn’t know anyone, and only said a few brief hellos to your fellow classmates. At the end of the week, through multiple contacts, you knew some names and had even begun small personal relationships. Finally, by the end of the school year you had developed full-blown friendships. Correctly implemented, your publicity and promotion will work the same way.
Imagine a new landscaping business that has targeted local office parks as its customers. Since the local building managers have never heard of this business, and normally sign yearly contracts for service, the new landscaping business might try the following:
- Place an advertisements in local oriented websites like Yelp and YP.
- Call the local office parks and find out the names of the respective building managers.
- Begin mailing letters and flyers to the building managers every 4-6 weeks.
After the fourth mailing follow-up with a phone call to see if the building managers might be interested in learning more about the service.
Location can lead to the success or ruin of your business. Since location requirements vary by the type of business, it is important to evaluate different selection criteria. For a merchandising business, choosing the right location usually involves tradeoffs between customer convenience and the rent expense. For a manufacturer or wholesaler, access to public transportation, like planes, trains, and interstate highways, is much more important.
As a retailer, you might ask yourself, “where are my potential customers relative to my store location?” Consider why there is such a difference in rent expense between Beverly Hills in California and the small college town of Athens in Georgia. In Beverly Hills, on streets like Rodeo Drive, thousands of potential customers with money to spend walk in front of the retail stores every day. Many of the retailers do not even have to advertise, there are so many customers with money to spend. In Athens, however, there is mainly a student population with little or no disposable income, and the retailers must constantly find ways to entice the students to spend their money. As you search for a retail location, it is important to remember that your rent expense, includes not only the cost of space but also the amount of publicity and promotion you will have to conduct.
If you are a manufacturer or wholesaler, your location needs are entirely different than a retailer. You do not need direct access to the final purchasers of your products and services, you only need access to the distribution systems, like the railways and airports. Low cost space becomes important to your profitability. Additionally, you might want to be near an area that has plenty of skilled workers in your line of business. If you are building Jet Airplanes, there will have to be some “rocket scientists” in the vicinity.
Depending on your line of business, some questions that will need to be answered in your business plan, include:
- What is the address of your business?
- If your business is merchandising, or retailing, what are the consumer traffic patterns? How many people walk by your store every day?
- If your business is manufacturing or wholesaling, where is the closest airport? interstate highway? railway line?
- Are there other similar businesses near this location?
- How many square feet will your business occupy?
- What size vehicles have access to the loading dock?
- Will you lease or own the space?
- How much will remodeling and upgrades cost?
- Are there any zoning restrictions in the area?
- What benefits does this location offer your customers? What benefits does it offer your business?
Unless you are starting a retail business, where all of your sales will be through a storefront, you will have to select the most appropriate channel(s) of distribution for your flash of cash. Channels of distribution get your products and services to the end customer. If you are a manufacturer, your products may flow through a wholesaler, and then to a retailer, before getting to the end customer.
To give you an idea about the variety of distribution channels, think of the ways you can buy a television today. They include:
- Retail stores
- Television home shopping channels
- Online stores
- Mail order catalogs
All of the ways that you can purchase a television represent different channels of distribution for the manufacturer of TVs.
You must use channels of distribution that let customers buy your flash of cash when and where they want to buy them. If your customers want to buy things over the Internet, or through retail stores, or with mail order catalogs, then you must give them that opportunity. If your store is only open from 10:00AM – 5:00PM on weekdays, then you are effectively closing down your channel of distribution for some percentage of your market that is at work during these hours.
If you don’t provide all of the channels of distribution that your customers want, then they will find a competitor to satisfy their needs. Think about mail order catalogs, or the Internet, that are open 24 hours per day, seven days per week. These mediums give customers the opportunity to buy products and services all day and night, and fully satisfy the “when” requirement. However, not everyone wants to buy clothes, or books, or electronics through catalogs or over the Internet (they want to try them first). Therefore, these channels don’t meet the where requirement. You must mix and match your channels to provide a where and when for a large percentage of your target market.
Marketing budget and timeline
Your marketing plan must account for the amount of money you are going to spend on advertising, publicity and promotion. Additionally, you should develop a timeline for when you are planning to spend it. Although you can look at trade figures for established businesses, that indicate advertising expenditures might be 5% of your total sales, you will be much wiser to itemize the expenditures in a “bottoms-up” approach. This is especially important if you are just starting out, since these expenses will be more for your startup business than for an established business whose name and products are already known.
The “bottoms-up” approach to developing a budget recognizes the individual advertising and promotion activities that your business will perform throughout the year. For instance, a startup business might plan to place an advertisement on Facebook, run promotions through local newspapers, perform a targeted direct mailings, and conduct face-to-face sales calls. The budget for these activities could be broken down as follows:
Your advertising budget will implicitly incorporate the sales goals for your business. If you need to sell 100 units of product per month, to reach your end-of-year total sales goal of 1,200 units, then you must estimate the amount of advertising and selling effort that will be required to sell each unit. This is difficult for new businesses since they don’t have any history; however, a little common sense can help. To sell 100 units every month, means that on average you need to sell 5 units every day (using a 20 workday month). If one in ten (10%) of your prospective customers makes a purchase, then you will have to interest 50 customers in what you have to sell every day.
It is important to remember that your advertising and promotion must be continuous, since there will be little direct correlation between a particular sale and your advertising. You cannot just start advertising to offset a decrease in sales, and stop advertising to maintain your profits. If you have identified your target market and selected the most appropriate media to reach your prospects, then developing a budget to meet your sales goals will be straightforward.