Small Business Development Center
At Chemeketa Center for Business & Industry
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Category Archives: Pricing

Projecting Sales

By Chemeketa SBDC

Even if you are an existing business – you should be forecasting – projecting your sales.  You may use actual numbers if you have historical financial records.  But what do you do if you have nothing to refer back to?  You will need to determine how many potential customers are there, how many of these potential customers are likely to buy from you, decide the average sale per customer and then project this out for the year. Try this:

First, determine the total number of potential customers living in your territory.  (Don’t forget – the more clearly you can define your customer – the more realistic your research!) If you sell to the general public, you need to find the information from the new US Census data for your market area.  You can find this information on the web or at the library (http://www.census.gov).

If you sell to other businesses, there are many potential sources of information; one of the best is a trade association that represents your industry.  You can also find this information through a web search or at the public library.  Once you have determined the total number of potential customers living within your geographical area – you have the base to begin narrowing down your target market.

Second:  determine the number that will likely buy from you. You need to be realistic.   Consider your competition (both in number and quality), consider that some of the people will not buy from you or your competition, and consider people will find substitutes for your product.  What percentage of the total available population will you be able to attract?

Third: determine your average customer sales per year. How many purchases will your average customer make in a year? How much will they spend on each purchase?   Is this a repeat business or once and only once.  Does the average customer buy the same product/service or will they need other complimentary services?  Trade associations are good sources of information to help answer these questions.

Fourth:  determine your annual sales volume. You have determined the number of customers and determined the average amount each customer will spend per year.  Multiply these two numbers together to calculate your expected annual sales volume.

Finally:  Evaluate the annual sales volume figure.  Does the number you calculated make sense?  If not, go back and work the numbers again.  What assumptions have you made about your customers?  How accurate or risky are these assumptions.  You can guess, and this is not a bad place to start.  But – then – you need to back up your assumptions with actual figures to gain the greatest degree of reality for your projections.


Effective Pricing Strategies Can Help Business

By Chemeketa SBDC

Pricing products or services correctly is a crucial function of a business owner. But how do you go about doing that consistently and fairly?

Pricing obviously plays a large role in whether a business is profitable. The difference between your selling price and the cost of a product is the “contribution margin.” The contribution margin pays for all other expenses and then after that, some profit. Even if sales are high, you may still find there is no money left at the end of the month. This lack of cash can be from expenses that are too high, but many times it is because you do not have an effective pricing strategy. The difference between sales and profit is found in your pricing policies.

Some small businesses use the manufacturer’s suggested retail price. It is an easy strategy to use but it may not be right for you. It may create an undesirable price image and it doesn’t consider the competition’s pricing strategies.

Another tactic is pricing based on the competition. This is where many small businesses get in trouble — trying to compete with the mass merchandiser. Many of these “giants” can sell at retail for less than you can buy at wholesale. So while you may generate a great deal of revenue, you may be losing money with every product you sell.

You can price below the competition but this also reduces the profit margin per sale.  This strategy requires careful monitoring and the ability to react quickly.

You can price above the competition – when price is NOT the customer’s greatest concern.  Many people find their time much more valuable than saving a few dollars. Target your business at these individuals, not the bargain hunters.

The key to success is to have a well-planned strategy, establish your policies, monitor costs and evaluate your effectiveness. The formula is simple: Sales less cost of goods less overhead expenses equals profit.

Marcia Bagnall is Director of the Chemeketa Small Business Development Center and instructor of Small Business Management Program. This column is produced by the center. Questions can be submitted to SBDC@chemeketa.edu. Visit the SBDC at 626 High Street NE. or call (503) 399-5088.