The Marketing Plan - Determining the Appropriate Price

The actual process will take several weeks and should not be rushed. The initial thought is that the product is priced to perfection. The competitive market analysis says the price is right, your sales team is excited, and you have a good gross margin on the product. Nothing can go wrong. It is important to realize that the best product or best price/quality relationship is rarely the best selling product. Remember a good deal is one that the client perceives as a good deal. Another important factor in pricing is that pricing will change the quantity sold. Will you sell too little product driving up the fixed cost or will you sell too much requiring that you increase your production facilities? Although it may seem that you need a crystal ball to make the appropriate choice, this simple process will allow you to price, verify your assumptions and make the appropriate adjustments to hit your objectives.

Marketing, sales and financial teams need to be involved. Set up a straw man model, inserting the cost structures and the revenue streams. The key is to understand how price and quantity affects margins, infrastructures and the bottom line. Graphs are great visual support but I prefer a spreadsheet. The initial product and pricing has already been set. The sales force must commit to the quantity the sales force will sell.

Once the Sales force has committed to a number, they should explain exactly how they intend to achieve that number. In other words how many packages each salesman will sell. How many will be sold every day? Is there lead-time necessary for the sale of the product? At this point the question is how many have you sold of a similar product? How much time was required for each sale? In other words the entire group must challenge the sales force’s capacity to make the numbers. At the end the number will change, higher or lower but it will change.

The Financial team should plug the pricing and sales numbers into the model both on a weekly and a monthly basis. The numbers should then be matched against productions capability to produce and should sales be back loaded a cost should be added for inventory and storage. It should also be assumed that 50% of the inventory will go unsold.

The financial team will indicate that the numbers work or they do not. If they work then marketing needs to adjust its advertising and support programs and indicate whether or not the addressable market can actually be acquired. Marketing numbers will most likely change and need to be inserted into the model by the financial team.

At this point the financial team will surely say that the numbers no longer allow sufficient gross margins. Everyone will be frustrated and throw their hands in the air and argue. Negativity will abound. Phrases like:

“Well then we just kill the product.”
“What do you mean we can’t do that?”
“Why are you against this launch?”

At this point, stop. Make sure everyone has a complete copy of the charts, the proposals and the numbers. Go home and come back after one week and start over. This will take several weeks. If it does not it is most likely you are not prepared to launch the product. In all of the product launches I have followed we have never seen the pricing be correct on the first try.

This process will help the entire executive team understand what it will take to be successful. It will also help understand the importance that the entire team meat their daily, weekly and monthly goals. Remember, you can always cut costs, but if you do not have sufficient revenues you will bankrupt.

Tags: Small Business Private Equity Business Plans Financial Model Financing Marketing Sales Product Pricing