Pricing and the Rise in Interest Rates

After several years of low interest rates, the Federal Reserve has determined that inflation is taking hold and thus the need to raise interest rates to keep inflation at bay.  What does this rise in interest rates mean to you as a business owner?

It means that the products you sell will cost you more because your supplier will increase his prices to you.  It means that if you purchase your products on credit, the interest rate associated with your credit card will also rise and your installment payments will increase as well.  Any loans that you may require will carry a higher interest rate and you will be paying more for the cost of money. What are you going to do to maintain your profitability with these increases?  You are going to raise your prices to your customers as well.  But, increasing your prices comes at a risk; that is, losing some customers.  What are you going to do?  Raise your prices, of course.  Here are some strategies to consider.

Marketing and Advertising

When developing your marketing plan, you must think of the perceived value that your product offers your customers and express it in a way that your customers will understand it. Remember when you created that business plan, you had certain specifications for the products you would sell.  In addition, you would offer your customers one or more of the following values and benefits: quality, durability, selection in your product line, convenience, features and availability.  These will attract your customers even when you decide to increase your prices.  And, remember to toot your competitive horn when placing ads or delivering that pitch.

But, How Much?

You should be methodical in determining the amount of that increase.  Rather than making sizeable increases, it is more acceptable if you were to increase prices in increments.  For example, a $1.00 increase might make customers hesitate less than a $2.00 to $5.00 increase.

Concept

Starbucks changed the rules of the game of selling coffee.  You could go into a Starbucks and sit and do your computer work or meet friends, or even have a meeting, all for a cup of coffee.  Customers became so hooked on their coffee that they would buy it no matter the price.  Consider how you can change the rules by rethinking what you are selling.  Ask yourself, “How do I add value?” and “Who is willing to pay for that value?”

Target Market

You must think about the customers you have; would they pay a higher price for your product?  Companies should always set prices according to what their customers are willing to pay. Remember: “it is what the market will bear.”

Tiered Pricing

There are lots of ways to charge different people different prices.  You can create two tiers for example, call one “elite” and the other “basic.” Consider the tiers of pricing that the cable companies use for their offerings.

Timing

Roll out your increases gradually over a year.  That will take the sting out of the increase.

To gradually increase your pricing will insure that you will be able to maintain your profit margins and continue to do business.

What Makes a Good Business Plan?

Over the years I have read and critiqued many business plans produced by students in my Entrepreneur classes.  Few are great, others are not so great.  So, what is the difference in the great ones that make them stand out?  What are the elements they should contain? 

The answers to these questions encompass, among other things, what the business is, the products or services that you want to develop, how the operation works, what you are up against in the way of the competition, what consumer need you are fulfilling, and lastly, what is your experience in this business?  Of course, you will begin with a concept, but a business plan is not just for concepts.  There are goals that must be presented with solid, reasonable tactics and strategies that will result in a good business.

The development of these tactics and strategies are in the marketing plan, the crux of your business plan. Following the tools of marketing, the 4Ps of Product, Price, Placement and Promotion, is the key.  To do this you must do market research to vet or validate your business concept.

Many students fail to do significant market research.  Learning all about the consumer and his psychological makeup will help you design a product or service that will appeal to him. Comparing your product to the competition in the way of price, quality and costs to manufacture are important factors to work on. Differentiating your product from the competition to attract buyers is important. Looking at consumer buying trends, new innovative products and, of course, the technology that will reduce costs to manufacture and distribute products must be considered and studied.  Knowing these and incorporating them in your planning will help you stay ahead of the competition.

Communication with prospective consumers is so vital to convey what you have to offer and to attract and motivate them to buy.  Advertising and promotion — by utilizing social media, ads in newspapers, television, local ad placement — are ways to keep your name in front of the consumer.

Financial projections are another important part of a business plan. They reflect how you are going to make money.  You will consider your costs and expenses and determine the number of units that will be sold and at what price.  This is where competitive analysis comes into play.  How much are your competitors charging for similar products or services?  How much are they selling?   Is there demand for your product?   Do you believe you will be able to take a share of their market away from them in order to have a successful business? Starting in the first year, how much will you project to sell, then determine for the second year how much of an increase or growth from the first year is reasonable, and so on. You must consider seasonality, cyclicality and economic conditions, and adjust the projections for these. The answers to these questions are daunting and difficult to achieve without research. 

The writing style the plan contains is concise and accurate information geared toward your audience of potential investors and bankers.  Including charts, graphs, and pictures of the product make appealing reading and can show at a glance the data and points being made.  Show your completed draft to some friends who do not know your business to determine whether they understand it and address any ambiguities.

The key to a good business plan is market research. The more research you do, the better your planning will be.  For a start-up business, the projections will help to determine whether you have enough money to start the business and stay in business.