In Step 3 of "10 Steps to Open for Business," answering the “Defining Dozen” questions is vital to writing a good business plan. The Sloan brothers describe them in detail in StartupNation: Open for Business, their book. Here is the eighth of those questions, in a special book excerpt:
How will customers buy from you, and how much will they pay? Outline in detail just how you plan to get your product or service out to the market. This includes describing how you’re going to manufacture your product and how you’ll deliver it. Will it be sold over the Internet or from the shelves of your own Main Street store? Will you have distribution into the “big box” retailers or use a national network of sales reps? Just remember that you must have a well-defined and achievable plan in order to get what you’re selling in front of your customers.
And what about price? It’s a critical component of success. Price your offering too high and nobody will buy your product. Price it too low and you might be leaving money on the table, or, worse yet, you might not make any money at all. Cheryl Tallman, whom we feature as Super Startup #3 later in the book, started a company called Fresh Baby. What Cheryl did to position her products for success perfectly demonstrates the importance of appropriate pricing. She wanted to make sure that the prices for her freezable trays for fresh baby food and mother’s milk were below those of her well-known competitor Tupperware; she knew a lower price would differentiate her product. But the manufacturing cost of an initial run of 2,000 trays was relatively high. So instead of pricing her trays based on the cost of the initial manufacturing quantity, she asked her supplier how much a run of 50,000 would be.
In the higher volume, the unit price came way down.
“I took into account those extremes in price and picked a price in the middle. It was a price where I could still make money but undercut Tupperware’s pricing.” This meant Cheryl would lose money on those first 2,000, but as soon as the volume of sales increased she’d be making good profit margins overall. Cheryl’s story conveys perfectly why you should consider your customers closely. Figure out what price your customer would pay for the product and determine if you can offer better customer service than your competitors. Never, ever forget who pays the bills—your customers.
Excerpted from StartupNation: Open for Business Copyright© 2005 by Jeff Sloan and Rich Sloan. Excerpted by permission of Doubleday, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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