If you’re in the preliminary stages of developing your product or service, you should already be asking yourself a few basic questions in order to discover your optimal price points. It’s not rocket science but you’ll need to do research to discover the balance between what your customers are willing to pay and what you need to charge to make a profit. To begin, start off with these “building block” considerations:
Figure out how your business is going to generate revenue.
Think about how much people will be willing to pay for your product or service. Survey the market if you’re not sure. Look at your competitors’ websites and even in their stores. Determine whether you will charge more or less for your product or service compared with theirs, and provide justification for this decision.
Making a profit is how your business is going to stay in business. You have to make sure that your revenue will be greater than your expenses – in other words, you’ll need to generate a profit at some point. Most businesses take some time to become profitable. Now’s the time to research and run some basic numbers. Determine how much will you be paying for estimated expenses: producing your product or service; paying rent, consultants, or employees; and other overhead? How many sales will you need to make to cover your costs of operating (otherwise referred to as your break-even sales)? For example, if you’re selling a pet product for $10 and your monthly costs are $1,000, then you’ll need to sell 100 pet products to cover your costs to break even. Any sales above 100 pet products could mean profit in your pocket.
Determine whether you’ll produce your product or outsource, or if you’ll find a strategic partner to do it for you. For example, if you’re selling the $10 pet product and you form a relationship with a manufacturer to produce it for you for $1, this means that you’ve outsourced production and are paying $1 or 10% of the $10 sales price.
Some businesses require less capital to get going – for example, consulting service business. Other businesses require more capital to get going – for example, a bakery or restaurant. The average start-up cost for a business in this country is about $70,000. Determine key items that you’ll need to invest in to get your business idea going.
Keeping costs low in the beginning is really critical, so think about whether you can run the business out of your home and operate it virtually. If you’re operating a retail location or have special zoning requirements in your community, you may need to secure a lease for a business location. Make sure that the business location is appropriate for attracting customers and will maximize your opportunities for building the business. Consider these costs when you estimate your start-up costs; they can be significant.