Marketing and Pricing: Frequently Asked Questions

Table of Contents

• How do I research whether my small business' product or service will sell?
• What market research questions should I ask?
• What costs should I consider in determining how much to charge for my products or services?

How do I research whether my small business' product or service will sell?

Market research is the most critical element of successful business planning because it provides the basic data that will determine if and where you can successfully sell your product or service and how much to charge. It is a process that involves scrutinizing your competition and your customer base, and interviewing potential suppliers.

There are any number of benefits to conducting market research. It can help you create primary and alternative sales approaches to a given market, make profit projections from a more accurate base, organize marketing activities, develop critical short/mid-term sales goals, and establish the market's profit boundaries. First, you must define your goals and organize the collection/analysis process.

What market research questions should I ask?

Your research should ask questions of your customers concerning location, their needs and resources, what they can afford. I should also address larger questions, such as where you can create a demand, and can you compete effectively in price, quality, and delivery?

Furthermore, can you price the product or service to assure a profit? In addition, find out how many competitors provide the same service or product. Finally, it is helpful to understand the general economy of your service or product area and the areas within your market that are declining or growing.

What costs should I consider in determining how much to charge for my products or services?

Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, and therefore fail to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service. Cost components include material, labor and overhead costs.

Material Costs are the costs of all materials found in the final product.

Labor Costs are the costs of the work that goes into the manufacturing of a product. 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, insurance, retirement benefits, etc.

Overhead Costs are any costs 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 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 projected costs.