Marketing

How Can Your Business Measure Customer Engagement?

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Generally, there are three things to quantify – how often customers visit, how long they stay, and what actions they take while they’re there. Understanding this information will help your business maximize its investment in marketing.

In order to sell to customers, you have got to get them to engage with your small business. In order to sell to a lot of customers, you need them to engage with you heavily.

Therefore, it’s worth thinking carefully about measuring customer engagement. Customer engagement can happen in person, on a website, on social media, or over the phone.

Defining customer engagement is tricky. You’re likely to get 10 different definitions from 10 different people. Personally, I like to think of customer engagement as a reflection of how passionate your customers feel about your business.

If you’re going to make big efforts in the customer engagement arena – you had better make sure you’re measuring the results of those efforts. After all, you can’t improve something you’re not measuring. Fortunately, there are many metrics that you can track to see if your efforts are bearing fruit.

These metrics fall into three broad categories:

  • How often your customers engage?
  • How long your customers engage?
  • What actions are they taking when they engage?

What is meant by customer engagement?

Customer engagement is a term used to describe the active involvement of a consumer in a company’s product or service offering.

It’s about creating an ongoing dialogue with customers, and it takes many forms:

  • Customers who feel that they can influence a product or service offering (such as government services).
  • Customers who are encouraged to provide feedback on products/services (and whose feedback is acted upon).
  • Customers having ownership over their experience. This could be through buying shares in the business or other methods where customers become owners.

Here are a few examples:

Part of the Solution

People will always complain about customer service. However, if you look around, there are ample examples of brands making consumers part of the solution. This happened in a big way in the airline industry after 9/11. Airlines needed to improve service or face losing customers.

In many cases, they brought in the consumers by holding town hall meetings as part of the solution. Customers aired their grievances and were rewarded for constructive criticism with better service.

Crowdfunding

In other instances, consumers raised money via crowdfunding sites like Kickstarter to fund development projects of products that had not yet hit the market.

It is interesting how companies are trying to get new technologies out there by using Kickstarter so people can test them before buying them. For example, this was used on the Amazon Echo when Kickstarter backers got a special price to buy it.

Marketing Strategy

In other cases, companies have co-opted the customer as part of their marketing strategy, which is a modern twist on word-of-mouth promotion.

For example, a recent campaign by clothing company Patagonia encouraged customers to return their older jackets via a special box they created, with every returned jacket being recycled into new materials for future use.

It’s an attempt to stop ‘fast fashion’ where many clothes are cheaply made and only worn once before being discarded. The campaign essentially told consumers: “you can help us make better products, and we’ll reward you for doing so.”

It’s also interesting how companies rely more on word of mouth or ‘buzz’ where they give discounts to people who talk about their products.

How often are your customers engaging?

One of the biggest mistakes that small businesses make is doing too much (or not enough). There is a good spot in-between and it depends on what type of business you have, how often you offer your service, and who the customer is.

A prospect that visits your business and then disappears is a lost opportunity.

If a prospect visits your business and becomes a customer – that’s valuable, of course.

If that customer keeps coming back – that’s the most valuable of all.

It’s from the repeat customers that you get the most bang for your marketing buck.

If customers keep coming back, you can assume that they feel as though they are getting value from your product or service. The more often they come back, the greater the value. Customers that engage daily are generally worth more than does that do weekly or monthly.

Applications such as Google Analytics will tell you how frequently (potential) customers visit your website. If you sell your products/services in-person or over the phone then gathering customer information might help you to understand customer engagement. Rewards programs might also help here too.

How long are your customers engaging?

Customers who receive high value from your products and services are not only going to visit often but they’ll stay for longer too.

Again, there are many options when it comes to software that measures user frequency and activity time for your website. Activity time is not as easy to measure for a brick-and-mortar business. If most of your customer activity is over the phone, it might be that you have records that can give you some insight. Or, it might be the sort of thing that you can log into your CRM software

In-person, this can only be practically measured through observation. Therefore, the results will be anecdotal. However, if you commit to measuring this information, insights can be gathered. It might be that you need to group customers by demographics when measuring.

What actions are your customers taking?

A company cannot think about every possible customer, product, and context interaction. However, no business should forget to get basic information from customers.

Customers who come often and stay a long time are positive indicators, certainly. But, ultimately you need those customers to take action. The ultimate action you need them to take is to make a purchase.

If your business is online, you can measure what pages customers visit, if they opt into marketing communications, if they abandon their cart, plus a multitude of other things. For a brick-and-mortar business, as usual, it’s not so easy.

A brick-and-mortar business that only deals with customers over the telephone could only really document what the customer said. Speaking is really the only “action” customers can take. For example, what products did they inquire about? What other questions did they have?

For a retail (in-person) business, again, you probably have to group customers by demographics.

I read a book on this subject once. Unfortunately, I can’t remember the title. Anyhow, it was about a guy who built a consulting business by documenting customer actions.

He would go into a retail business and take notes of the actions that the customers typically took in the store. He would also measure the amount of time they were in the store.

Armed with this information, he would then approach the retailer and offer to sell it. The information he gathered would speak volumes about customer actions and habits. Much of the retailers’ responses revolved around repositioning merchandise in the store.

If you’re a retail small business owner, you don’t have to approach this as scientifically as the author of the book did. But, you can do something similar. It’s just a matter of setting aside the manpower. Discreetly watch the actions that customers take in your store and document it. Plug the data into a spreadsheet or some other software where you can interpret it. Then, take the necessary actions.

Below, are some ideas on customer actions that you can measure. Many are similar across all three mediums. Others, with a little tweaking, might be applicable in another medium.

Website/OnlineIn-personPhone
Visiting your websiteVisiting in-personCalling your business
Viewing/clicking an adReferencing an adReferencing an ad
Downloading documentTaking a flyerReturning a call
Opening emailAsking for assistanceMaking a purchase
Requesting more informationMaking a purchaseRequesting more information
Viewing webinarAccepting assistanceCompleting a survey
Visiting online storeJoining rewards programAccepting solicitation
Making a purchaseApplying for financing
Contacting live chat
Referring customers
Completing a survey
Leaving a product review
Rating a product/service
Reordering a product

Challenges to measuring customer engagement

Marketers measure customer engagement by email, social media, website traffic, and purchases. But they often forget to include service metrics.

As you might have gathered from the previous sections, measuring customer engagement isn’t always simple.

Sometimes, collecting data is logistically difficult. Such as documenting what actions your customers are taking. Other times the information is hard to quantify and interpreting actions can be very subjective.

Ultimately, you want to measure customer engagement to understand how it will affect your revenue and net income. But, making the connection between actions and revenue can be difficult. Don’t lose sight of your ultimate goal – which is to build a healthy small business.

What do you do with customer engagement data?

Collecting and analyzing customer data will help your marketing campaigns. It also lets you improve the customer experience, like by giving people better product recommendations, communicating with them more often, or even making sure that they stay loyal to your company.

Once you’ve gone to the effort gathering customer engagement information, what then?

It may be that, in the beginning, you simply want to understand how your customers are engaging with your business. But, there will come a point where you want to act on the measurements you gather.

At which point, you need to be clear on what it is you want to achieve.

Do you want to increase the frequency of customer engagement?

To get more out of your marketing dollars?

Or, do you want customers to take different actions?

You can get even more specific. For instance, do you want to sell more of a particular product/service to a particular customer avatar?

You might find that you need to start using different customer engagement metrics in order to meet your more lofty goals.

What it all means

Measuring customer engagement is important for maximizing your marketing ROI. It’s also closely tied to your conversion funnel – turning leads into customers.

Therefore, even nominal efforts in measuring customer engagement can go a long way toward helping your small business.

An expert’s thoughts on customer engagement

Snigdha Patel, Deputy Manager – Content Marketing at REVE Chat

How would you, personally, define customer engagement?

I would define customer engagement as any interaction that happens between a consumer and the brand across multiple channels during the customer journey. The whole idea of customer engagement is not only selling but also to have continuous engage customers through their lifecycle. Having a solid customer engagement strategy is vital for delivering a conversational experience.

What are some ways brick-and-mortar businesses can track customer engagement?

Some ways the brick-and-mortar businesses can track customer engagement are:

1. Store visits – It includes the number of transactions per month

2. Spend per visit (basket size) – Refers to an average $ size per transaction

3. Product spend – It indicates the revenue by category, upsell, and cross-sell rates

You can set a CSAT survey to track your store experience based on the score by asking ‘how satisfied were you with your most recent experience?’

What should a business do once they’ve gathered customer engagement data?

Once the data is collected the data, businesses can proceed with the following steps:

1. Segment the data based on your target audience and product category to understand how your customers are spending.

2. Identify your value in terms of your product positioning and identify the gaps to align your products to your target audience.

“Why Is Customer Information Important?” 14 Examples to Collect

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Why collect customer information at your business? Knowing your “customer avatar” (buyer profile) is maybe one of the most important aspects of marketing your small business. It allows you to put the right products and services in front of the right customers.

In order to understand your customer avatars, you’re going to need demographic and personal information about them. You could speculate, of course. Which is what you probably had to do in the start-up stages of your business. But, if you’re established, hopefully, you have some of this information already.

Maybe you are collecting customer information but, you don’t know what to do with it? Customer information can come from purchases, feedback, social media, or rewards programs. In order to market effectively, you’re going to have to get your hands on this information. It will allow you to give your customers what they actually want.

Customers want to be catered to

Your customers might balk at the idea of your businesses collecting data on them. Many of those same customers also want to feel like they’re the center of your attention. Like your business was made exclusively for them.

Privacy is a very important issue. You do not want to violate your customers’ trust. However, you still want them to feel like they’re the center of your business’s universe.

Customers also tend to think that they don’t want to be marketed to. The truth is, probably, that they don’t want to be marketed to – for the wrong products and services. Everybody wants to know about products and services that will solve their problems, give them pleasure, or help them avoid pain.

Collecting customer information that will help you serve them better

Collecting information on your customers will allow you to market to them only when it’s appropriate to do so. It’s a win-win.

As I said, customers don’t want to be sold on things they don’t need. On the same token, you don’t want to spend your valuable time and money marketing to customers that would never buy. Wasted money only drives up your costs and their prices.

Collecting information from all customers might be overwhelming. Stick to your best, and most frequent, customers. Try enticing them with an incentive such as a coupon, discount, or other special promotion. The insight you can gain will be exceedingly valuable.

Meet your customers where they’re at

If your marketing reaches out across a multitude of different channels, there’s a possibility that’s your throwing away time and money.

Your customer avatars aren’t on every channel. Some might be reached via one channel but not another. The same audience that responds to email marketing probably isn’t the same one that responds to social media marketing.

The better you understand your customer avatars, the easier it will be to communicate genuinely with existing customers and to find new ones.

Your competition is probably gathering customer information

Do you think gathering customer information sounds like a big inconvenience? Fair enough. But, there’s a good chance that you have a competitor who doesn’t share that opinion.

However, if you embrace the ethical gathering and use of customer information, then you’ll have a leg up on the competition who sees it as too much trouble. Every day you spend weighing the pros and cons of gathering customer information is one you’re potentially losing market share to your competitors

Customers are Dynamic

Maybe, at some point, your business has gathered some customer information? But, maybe that was years ago? Customer avatars shift. Everybody ages. What was valuable years ago might not be valuable now.

As a business owner, you know that it takes way more time and money to find new customers then it does to take care of the existing ones. Make sure you still understand your existing customers. Make sure you can still give them solutions to their problems.

If you have collected the customer information in the past (and stopped) then it’s time to start doing so again.

Collecting customer information is only half the battle

It might be that you’ve accumulated a decent amount of customer information through your normal course of business. Information that’s necessary in order to serve your customers. if you have this information, then put it to use.

Get it into a spreadsheet and start analyzing it. Look for reoccurring themes and patterns in your customers’ demographics, spending habits, and feedback. Doing so will hopefully allow you to understand them that much better and to deliver a higher level of customer service.

What about B2B customers?

Collecting data on customers it isn’t just for businesses that sell to consumers (B2C). Business-to-business (B2B) companies need to collect customer information for the same reasons.

So what information to collect?

Of course, you want to know the name of the company, its size (typically in terms of revenue), and the industry it operates in. Additionally, you’ll want the name of your contact at the business along with an email and phone number. You’ll probably also want to know the contact’s position within the business.

It may not be your contact that makes the buying decisions, though. It may be their boss or someone in a different role. Perhaps it’s an executive who you can never seem to talk to directly. Don’t market to your contact if it’s someone else who’s making the buying decisions.

Hopefully, you know what your unique selling proposition (USP) is. Though, it may not be the reason that every business purchases from you, it should hopefully serve as a good starting point.

How did this company find out about you? Sometimes they’ll volunteer this information freely. Obviously, knowing this is valuable because it tells you which of your marketing channels is reaching your business customers.

Word-of-mouth advertising among B2B businesses is not as powerful as it is among B2C customers. However, even if the decision-maker wouldn’t technically recommend your product and services, knowing that they would theoretically put their reputation on the line for you is valuable information. People tend to regard their professional reputation higher than their personal. So, it would mean a lot. The only way to find out is to ask.

Safeguarding customer information

Collecting customer information is important. Being a good steward of that information is even more important. You don’t want your personal information compromised by any businesses that you patronize. So, make sure you protect your customers’ information as diligently as you would want yours protected.

Obviously, beyond the ethical obligation, there are legal and financial reasons for doing so. Yes, there will likely be expenses involved in collecting and keeping customer information. The protection from downside risk should make these expenses justifiable. Don’t forget about the indirect risks either. Risks such as damage to your small business’s reputation.

This is an area where you can’t be reactive. You have to be proactive. Remember that if you have customer information, you are a target. Keep your security software up-to-date. Require the use of strong passwords. Be mindful of third-party access to customer information. And, last but not least, test your vulnerabilities.

What customer information to collect?

Here’s an idea of where to start with your customer data collection efforts.

This list is by no means exhaustive. Nor will all of this information be necessary for every business. But, it can serve as a starting point.

Ultimately, you need to find a balance between what your small business needs, what your customers are comfortable with giving, what you can protect, and what’s legal to collect.

B2C Customer InformationB2B Company Information
Customer nameCompany name
Customer genderCompany industry
Customer ageCompany size (revenue)
Customer professionContact name
Customer addressContact email
Customer emailContact phone number
Customer phoneContact position
Customer incomeWho makes the buying decisions in the company?
Purchased by customer individually or as a family?Why did the company choose you?
Why did the customer choose you?How did the company find out about you?
How did the customer find out about you?Would the company (theoretically) recommend you?
Would the customer recommend you to others?Why did the company stop using you?
Why did the customer stop using you?Are they among your top 20% of companies (revenue)?
Are they among your top 20% of customers (revenue)?

Pricing Strategies for Startups and Established Businesses + Spreadsheet [VIDEO]

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Video transcript

00:06 hey guys back here with another video
00:10 finally most of my previous videos on
00:15 most of my recent videos have been on
00:17 the subject of QuickBooks Online and go
00:20 in a little different direction with
00:22 this one actually I’ve written quite a
00:25 bit on the website about business plans
00:30 and most of that so far is focused on
00:34 market research for a business plan and
00:37 this is kind of the last piece of
00:39 content on that particular subject and
00:43 from here it’s going to move on to move
00:49 on to writing the business plan in
00:51 earnest but anyhow rather than write
00:55 this one out as a blog post you know
00:58 those were kind of hit and miss as far
01:00 as traffic goes I thought I would just
01:01 do it as a YouTube video and see what
01:06 kind of reception that got and that’s
01:08 what brings us here so like I said this
01:10 is
01:12 part of the part of market research an
01:16 important part of business plans and in
01:19 particular it’s about pricing strategies
01:22 for for startups and really this will
01:25 also work for existing businesses too
01:27 you know you you probably have a little
01:30 more flexibility when you’re settling on
01:34 pricing as a start-up than you do as an
01:36 established business it can be kind of
01:39 hard to pivot into something else when
01:41 your customers come to expect a
01:43 particular particular pricing strategy
01:46 from you so but you know nevertheless if
01:49 you have an existing business and are
01:52 interested in the tool that I may do
01:55 along with this which we’ll get to in a
01:57 little bit and the strategies and that
02:00 there’s a like I said here 16 of them to
02:03 think about and let’s get into it here I
02:06 like to start every video I have with
02:11 kind of a quick answer or summary what
02:14 I’m gonna go over and doing the same
02:18 here so pricing will have a huge impact
02:23 on your business you know that’s your
02:26 probably like and no kidding
02:29 you probably already knew that and you
02:32 know but I had read somewhere wouldn’t
02:35 as kind of doing the research for this
02:37 video about how you know like a 1%
02:40 change in pricing can have up to an 8
02:43 percent change in sales you know and it
02:48 really is if you can
02:51 increased prices by 1% you know that can
02:55 have a depending on the the mix of
03:00 products you’re selling you know that
03:02 can have an enormous effect on enormous
03:06 effect on your on your sales and
03:08 therefore your profitability you know
03:10 keep in mind as we go through this that
03:12 not all strategies are going to be
03:14 appropriate for your business you know
03:17 there’s 16 of them it’s gonna seem a
03:20 little overwhelming and you know don’t
03:25 think that every strategy you know you
03:29 have to work in to your your particular
03:33 business somewhere you know it’s not the
03:35 case it might just be one strategies
03:37 right for you you know it is a bit of
03:40 information overload but I give you all
03:42 this information because you know so you
03:47 can be aware of this about every
03:50 strategy I was able to find I don’t know
03:51 that it’s every strategy period in terms
03:55 of pricing but it’s a quite a few of
03:59 them and a lot a lot to consider but you
04:03 know just you some will jump out at you
04:06 as being practical for your business and
04:08 you know those are the ones you want to
04:10 kind of move forward and maybe look at
04:12 implementing and keep in mind that they
04:14 can be combined and different strategies
04:17 can be used on different products and
04:19 services or different types of customers
04:23 and you know
04:27 things are in the small business world a
04:33 little a little crazy right now I mean
04:36 first potentially he gets shut down for
04:39 a couple of months on account of kovat
04:42 19 and now some small businesses
04:46 fortunately not many in the grand scheme
04:49 of things but you know unfortunate for
04:52 those that it’s impacted or victims of
04:55 rioting looting and other sorts of
04:59 things you know they’re paying the price
05:01 for something that they had no you know
05:06 had no part in no injustice that they a
05:09 pardon and you know of course that
05:11 stinks and the reason I bring all that
05:13 up is it’s you know it’s been a an
05:15 insanely volatile year to be a small
05:18 business owner and you know so as we go
05:22 through these strategies what I’m
05:24 getting at here is that it it’s
05:25 important I think you know not just in
05:29 pricing but in everything to start to
05:31 think about implementing procedures
05:37 policies strategies you know whatever
05:39 you want to call them just you start
05:40 start doing business more flexibly with
05:45 more flexibility and
05:49 you know be able to pivot you know they
05:52 not get you as RIT as rid of as much
05:56 rigidness as you can because it’s I
05:59 don’t know manda it’s a it’s been a
06:01 crazy year and it’s a crazy world and
06:04 maybe this is you know maybe we’ve seen
06:08 the worst of it for a while that maybe
06:10 we haven’t you know I honestly don’t
06:13 know I wish I did but you know like I
06:16 said I think it’s important to move
06:19 forward and the lessons that can be
06:20 learned from this is that yeah the
06:23 rigidity just won’t won’t work so you
06:26 know every business is different so I I
06:29 hate to speak in such generalities you
06:32 know if you’ve watched any of my other
06:33 videos ready and other my posts that you
06:37 know I hate I like to get specifics
06:40 where I can or you know concrete
06:42 information where I can and not not deal
06:45 in abstraction as much because you know
06:47 that doesn’t help you I mean it might
06:49 give you a little something to think
06:50 about but you know people people want
06:52 answers and you know so I beg your
06:56 pardon for that but you know that’s the
07:01 best way I can phrase it now you know
07:04 just you know with everything else but
07:09 in particular since we’re on the subject
07:10 of pricing strategies here just to
07:12 gravitate more towards the ones that are
07:14 more that are more flexible if you can
07:19 then kind of we go through the
07:22 strategies we’ll we’ll get to a tool
07:24 that I made in Google sheets so you can
07:27 download it for free it’ll be on I
07:30 always make a post of the videos when
07:34 I’m done and where I’ll have the slides
07:38 here and then transcript from the video
07:41 the video itself and in cases like this
07:44 when I reference a particular tool that
07:48 I’ve made a spreadsheet
07:49 this is spreadsheets for business after
07:51 all anyways I’ll make it available on
07:54 there and you can go and download that
07:57 and this is a it’s something called the
07:59 price sensitivity meter it was a concept
08:01 that I’d come across
08:02 that I thought was interesting and
08:04 potentially helpful and what it’ll do in
08:07 essence is give you a range of
08:09 acceptable pricing you know kind of kind
08:12 of give you a some numbers start working
08:15 with and then you can implement the
08:16 strategies that are appropriate from you
08:19 for you from them and like I said
08:23 transcript and slides all that business
08:25 will be on spreadsheets for business
08:27 comm soon
08:31 so you know pricing is a complicated
08:37 subject you know it seems relatively
08:40 straightforward and will be more
08:42 straightforward for some businesses than
08:44 others but you know it’s a complicated
08:48 thing people get hung up on it it’s a
08:52 you know there’s just a lot of factors
08:55 at play you know that there’s course
08:57 competing on price with your competitors
08:59 but then there’s the you know your value
09:02 properties proposition versus your
09:04 competitors your you know unique selling
09:08 proposition USP Matt how you position
09:11 yourself the customer service quality
09:14 and all those things factored in and you
09:18 know really it if you look back at the
09:22 last year two years ago five years ago
09:25 whatever I mean you know for a little
09:29 thought experiment look back at those
09:31 years and ask yourself you know if I had
09:36 increased prices I mean again and maybe
09:39 just a little bit you know 1% bump here
09:42 a couple dollars there you know if
09:45 you’re a super small business couple of
09:46 dollars on the right items might have
09:49 you know might have been the difference
09:52 between a mediocre year and a bumper
09:54 year might have been the difference
09:55 between you know ending up in red and
10:00 ending up into black it’s you know it’s
10:05 completely possible so you know it is a
10:10 complicated subject and the point of
10:12 this is to hopefully an army with a
10:15 little information excuse me
10:20 army little information to kind of see
10:24 through the fog and iron you know get a
10:27 firm grasp on what your pricing strategy
10:31 should be and again I’ll reiterate not
10:33 all these strategies are going to apply
10:35 to you you don’t have to work every
10:37 single one into the
10:40 into your business okay and pressing can
10:45 being overwhelming oops back pricing can
10:49 be overwhelming touched on that earlier
10:51 a lot of things to consider dismiss
10:53 strategies that won’t work you know I
10:56 would also urge you to where possible to
11:00 air on the higher side of pricing you
11:03 know if you’ve ever done any reading on
11:05 the subject or research you know you’ve
11:08 you’ve seen similar sort of things said
11:11 and it’s it can feel tough to do you
11:13 know cuz II you nervous about losing
11:16 sales on account of pricing and you know
11:21 but it’s always easier to reduce for
11:23 promotions and you know hell you can
11:25 even run promotions fairly frequently
11:29 speaking of which I have a post on
11:31 promotions on spreadsheets calm
11:34 spreadsheets for business calm I wish I
11:37 owned spreadsheets calm but I don’t
11:39 spreadsheets for business about pricing
11:44 in QuickBooks Online you know running
11:47 promotions in that and then one beyond
11:49 that which also comes with the
11:51 calculator in regards to you know just
11:58 running promotions in the effect it can
12:00 have and everything so it’s like a
12:01 little handy little tool to estimate
12:04 what the effects might be
12:10 you know and I mentioned also earlier
12:13 that you can use different strategies
12:16 for different products and services you
12:19 know different categories different
12:20 customers you know again it be be
12:26 flexible you know not not rigid so
12:31 consider all these strategies we’re
12:34 gonna go through and use the
12:36 accompanying tool play around with it
12:39 download it you know and then armed with
12:43 all that information rely on your
12:45 expertise your intuition and you know be
12:49 willing to make some mistakes some trial
12:51 and error in terms of pricing it’s you
12:53 know mistakes are gonna be made it’s
12:57 it’s like budgeting you know we’re
12:59 forecasting I’ll tell you right off the
13:02 bat you’re not gonna get not gonna get
13:05 it exactly right forecast your exact
13:07 unit sales exact revenue exact costs
13:10 exact labor needed you know marketing
13:13 that the point isn’t to you know this
13:17 isn’t school you’re not graded on how
13:18 close you get to its actual you know
13:21 it’s really just to go through the
13:23 thought experiment of the whole thing
13:26 and to you know just think at everything
13:30 from from different angles and net and
13:32 then you know so don’t don’t worry about
13:34 making mistakes with your pricing when
13:36 you know try something and learn your
13:41 lesson from it and if it’s good keep it
13:43 if it stinks then do something different
13:48 okay so we’ll get into the strategies
13:52 here
13:58 all right and I’ll try to go through
14:00 them fairly quick we’re about 14 minutes
14:02 in now and you know I realize that
14:08 longer videos people people lose
14:10 interest and I guess I can’t blame him
14:14 so like I said I’ll try to go through
14:15 strategies pretty quick and then we’ll
14:17 get we’ll get to the touch on a couple
14:22 of things and get to the tool how to use
14:24 it okay so the first strategy is price
14:27 leadership okay
14:29 this is where basically a single
14:31 business would dictate market price and
14:33 this one isn’t gonna be really practical
14:35 for a startup unless it’s a brand-new
14:38 and brand-new market brand new items
14:42 something nobody’s seen before maybe
14:44 that’s cases you startup probably not
14:46 you know but you know again I just want
14:50 to make you aware of it so this is
14:51 something that oligopolies would do
14:53 which is a similar to monopoly except
14:55 they’re a couple of firms rather than
14:57 just one and this is like Airlines
15:02 wireless carriers film TV music you know
15:05 basically they dictate the market price
15:08 they have enough control over the market
15:10 to be able to do that and any little
15:13 player that wants to come in and get
15:15 involved with that or any other business
15:16 that wants to try to come in and take
15:19 some of that market share has got a you
15:21 know gotta be aware that the the leader
15:24 of the market is dictating the price so
15:28 premium pricing this is
15:34 by companies selling high quality goods
15:36 or services and that might be you that
15:39 might be your business model and you
15:41 know luxury items in that and you know
15:43 it’s not always that the items are
15:46 luxury you know luxury is kind of a
15:51 flexible term but you know like some
15:53 clothing brands name-brand clothing
15:55 sometimes is a very low quality you know
15:58 and you you can buy you know whether
16:02 it’s shirts pants accessories whatever
16:05 from a name-brand and it’ll fall apart
16:07 right away you know it’s not it you
16:10 really you’re paying for the name so
16:12 that’s why I say you know Oh having a
16:15 brand name is an instance where you
16:17 could still use premium prep premium
16:20 pricing if you’re not selling
16:22 technically high-quality goods or
16:25 services you know the customers are
16:27 paying for the status the paying for
16:28 that name okay so some examples of that
16:31 and this is not to say these things
16:32 aren’t quality per se but they aren’t
16:34 it’s not a given luxury cars and
16:39 designer clothes and Apple products are
16:41 a couple of examples that I was able to
16:43 find so the opposite of premium pricing
16:48 is economy pricing this is where you’re
16:51 doing bottom dollar pricing okay and it
16:54 depends heavily on selling a high-volume
16:57 products um you know to make up for
17:00 those low margins you you know you’re
17:03 gonna have high margins probably premium
17:05 pricing low margins with economy so you
17:07 got to sell a lot with economy so in
17:09 order to get away with economy pricing
17:11 you’ve got to have a good understanding
17:13 of your cost okay because those margins
17:16 are so low you can’t afford not to
17:18 understand what it takes for you to get
17:21 a product to market in terms of cost
17:23 okay because you you could either you
17:29 could price it obviously too low and be
17:32 selling at a loss and not knowing it or
17:35 conversely you could be pricing it too
17:38 high and leaving room for other
17:45 competitors
17:46 with you know a better grasp under cost
17:49 and can beat you on price because that’s
17:50 what you’re competing on is price you
17:52 know when you’re doing economy pricing
17:54 and a couple of examples that are warm
17:56 Walmart and private labels like you’d
17:58 find at the grocery store next one here
18:02 is premium decoy pricing this one gets a
18:04 little more advanced not quite as
18:06 straightforward so it’s a similar to
18:09 premium pricing
18:11 but it uses a similar product or service
18:16 at a much higher price so it’s priced on
18:22 the high end with a healthy margin okay
18:24 something to use a premium decoy pricing
18:27 you got you got an item a okay with the
18:30 with a healthy margin and that’s the
18:32 item that you really want to sell okay
18:34 but then you bring in item B which is
18:40 similar similar enough for a comparison
18:43 you know maybe with a little added value
18:46 but then it’s just priced through the
18:48 roof I mean it’s a ridiculously
18:51 overpriced and so what this does is it
18:54 plays on the concept of single option
18:55 aversion this is the name of the term
18:57 and it basically says that you know
19:02 customers are less likely to choose an
19:05 attractive product or service if there’s
19:06 nothing to compare it to so you know if
19:11 your business model is such that your
19:15 business is that you it kind of revolves
19:17 around one product you know that it
19:21 could present an issue for you when it
19:23 comes to marketing and sales because
19:25 there’s nothing to compare it to when
19:28 you’re when you’re pitching it to a
19:30 customer they you know people need
19:33 context we make sense of the world by
19:36 how we compare things to each other
19:37 things are things are better worse
19:42 I mean really you know we we categorize
19:45 everything in that way this car is
19:47 better and everybody has a different
19:48 opinion of course there’s no that one
19:50 universal opinion but you know in this
19:52 instance you’re you’re playing on that
19:55 kind of human tendency to just if you
20:01 know if you’re just presented with one
20:03 option well I don’t know is this a good
20:04 value or a bad value you know I’ve got
20:07 I’ve got nothing to compare it to so if
20:10 that’s your type of product you might
20:11 consider something like this add some
20:14 token bells and whistles price it way up
20:17 so then the item you’re actually trying
20:18 to sell looks good by comparison okay
20:21 they’re like damn this is a value you
20:24 know because this other thing that has
20:25 just a little bit more you know is
20:30 priced at this so this must be a good
20:32 value you know that it’s a it’s a little
20:35 bit of marketing trickery there so an
20:38 example the Apple products will do it a
20:44 little bit to where they’ll and I made I
20:47 put a copy of the link that I referenced
20:50 there at the bottom but Apple products
20:53 are have in the past I don’t follow
20:55 Apple that closely but like like a phone
21:01 with a little bit more storage will be
21:04 priced disproportionately high you know
21:08 to getting a little more value and but
21:12 they’re you know but they’re making it
21:14 bad option unattractive it’s there if
21:17 somebody wants it I mean somebody will
21:18 buy it because they want the best that
21:21 quote-unquote the best but you know
21:25 they’re really trying to sell the one
21:27 the more reasonably priced when the
21:29 middle the quote-unquote middle you know
21:31 the good better best they’re trying to
21:32 sell the better version so and then the
21:36 Economist is another classic example and
21:39 you’ll see quite a bit if you never
21:41 delve into this type of research in this
21:44 subject in terms of pricing that it’s
21:48 like
21:49 they sell the electronic subscription I
21:53 hope I’m not misquoting this and then
21:55 the electronic for less the print
21:56 four-way hider well hardly anybody wants
21:59 the damn print when I can just get it
22:01 electronically you know so you’re like
22:05 well why would I pay that much more this
22:08 electronic subscription alone looks much
22:11 more attractive so kind of went on about
22:13 that one for a while but it’s a you know
22:15 it’s kind of a fascinating thing I think
22:17 because of them you know the
22:20 psychological element to it okay so a
22:25 similar pricing strategy is bundle
22:29 pricing
22:32 so you’ve seen this no doubt I know my
22:37 internet company does it TV and Internet
22:41 bundled it’s you no way you pay him way
22:44 less for each you got automobiles with
22:48 extras you know sunroof leather seats
22:56 bigger engine the you know the GT model
22:59 whatever it may be they’re gonna you
23:02 know price it together an automobile you
23:05 can’t necessarily go get a sunroof extra
23:08 aftermarket I mean technically you could
23:10 I suppose but you know and that’s not
23:12 practical most people but excuse me the
23:16 games will bundle also you know Nintendo
23:21 Sony they’ll all sell you know whether
23:24 it’s a bundle of games or bundling the
23:27 console with the games so it you selling
23:32 items together and you selling them at a
23:33 lower price than you would sell them
23:34 separately and it gives a customer
23:37 better value customer recognizes that
23:39 makes attractive but when it does for
23:42 you then is also increased the sales
23:44 volume so included another link at the
23:46 bottom they’re gonna read a little more
23:48 about where I got those examples from
23:51 okay value-based pricing this is based
23:58 on you know and keep in mind like I said
24:01 these these can be combined they’re not
24:05 all mutually exclusive you don’t have to
24:07 pick just one so don’t just want to
24:10 reiterate that so now you base pricing
24:13 is where you price something based on
24:15 how much value your product or service
24:17 provides basically you know what’s the
24:20 utility it gives the the person who
24:23 purchased it you know if you’re selling
24:28 something that gives every every
24:32 customer infinite happiness for the rest
24:34 of your life and you’re selling it for a
24:36 dollar
24:36 well you’re not using value-based
24:38 pricing okay that’s that’s worth a lot
24:42 of money you know to have infinite
24:45 happiness for the rest of your life you
24:47 know you could charge almost anything
24:49 for that
24:52 so it’s it’s basically pushing the
24:55 threshold of what the customer is
24:56 willing to pay based off of your value
24:59 proposition similar to project pricing
25:01 which we’re covering a little bit it’s
25:04 you know cost is not critical in the
25:07 sense that you still need to be making a
25:09 profit of course you know there you
25:12 won’t be in business for long but it
25:14 might be that the value of what you’re
25:17 selling is not much above your cost well
25:21 then you need to look at lowering the
25:23 cost or increasing the value of course
25:26 flipside you know the margin might be
25:28 really big so not it’s not to be
25:32 confused something with another one we
25:35 talked about earlier value pricing of
25:37 course that was economy pricing where
25:39 you know you’re selling low margins
25:41 high-volume okay so in this case it
25:45 could be you know that luxury
25:46 automobiles would fall but fall under
25:49 that category like I said some might be
25:53 overpriced others might be priced at the
25:55 value they provide you know they’re
25:56 high-quality automobile that oh you know
26:00 that is reliable and beautiful and
26:03 everything you want
26:05 and you know it’s priced accordingly but
26:08 you if you’ve got the money you pay that
26:10 because that’s what it’s worth to you
26:12 another example might be professional
26:15 services or consulting okay you know
26:19 particularly those for a business if
26:22 they’re providing a lot of value if
26:23 professional service is going to help
26:25 you make a million dollars more in sales
26:27 well and charging you a hundred thousand
26:29 dollars potentially is it’s well worth
26:33 of you know that’s what it’s worth I
26:35 mean you’re still earning an excellent
26:37 return
26:40 this one’s psychological pricing this is
26:42 one obviously it can be easily combined
26:44 with others it’s a we’ve all seen it you
26:47 see it everywhere you know we think we
26:51 can see through it but you know research
26:53 says that it that it works that they
26:55 sell businesses sell more products and
27:00 services when they’re priced with that
27:04 99 cents eighty-nine cents or just you
27:07 know just shy of a certain threshold you
27:11 know it’s not by seeing a one at the the
27:19 beginning of the 1999 price it you know
27:21 I get you know again I’m sure you think
27:25 you see through it I think I do but you
27:27 know apparently not everybody does but
27:30 you know if I seen that one instead of a
27:31 two instead of just pricing is straight
27:33 twenty you know it they’re more they
27:38 feel like they’re getting more of a
27:40 bargain so you know you sacrifice very
27:43 little in revenue to potentially sell a
27:46 lot more so definitely a strategy worth
27:50 considering and like I said we see in
27:52 retail at a time and see with
27:54 automobiles you know car price to
27:57 nineteen thousand something 29,000 some
28:01 thirty nine thousand something you know
28:02 it’s a frequently relied upon strategy
28:08 okay
28:11 tration pricing
28:15 so this is a this is a potential
28:19 strategy to use the first startup it’s
28:23 typically one used by new market
28:25 entrants and it’s used to accumulate
28:28 market share with low pricing basically
28:31 swoop in say hey we’re brand new to this
28:33 market look how attractive this pricing
28:36 is give us a shot okay and you know
28:40 hopefully that the pricing is good
28:46 enough that it will compel people to try
28:47 your product or service that day they’ll
28:49 be like you know might as well give
28:53 these people a shot you know this is a
28:55 this a hell of a bargain you know and
28:58 maybe maybe it stinks hopefully not but
29:01 in this what they’re thinking you know
29:03 maybe this product or service stinks but
29:06 you know at this price I gotta at least
29:08 try it okay so it’s short-term strategy
29:10 you don’t if you do it for long term
29:12 you’re gonna be doing economy pricing
29:14 and you know that’s tough for small
29:16 businesses to do economy pricing they
29:20 just don’t have the economies of scale
29:22 that a Walmart or whomever does so you
29:27 know again you want to keep this
29:28 strategy to the short-term and be ready
29:30 to transition to a new strategy you know
29:35 to raising prices to a more appropriate
29:39 level later and hopefully by getting
29:41 people to try your product or service by
29:44 luring them with the penetration pricing
29:46 your unique selling proposition you’re a
29:49 quality customer service whatever it may
29:52 be will compel them to remain customers
29:54 then you know you’ll probably have some
29:56 fall-off of demand of course but you
29:58 know hopefully then you’ve got gotten in
30:01 there and claimed a little bit of the
30:04 market for yourself so you know you can
30:07 then move on to a new strategy build
30:11 your business off of that initial grab
30:13 of market share and a couple examples
30:16 businesses that have done this is
30:17 Netflix and not the Netflix is expensive
30:21 now by any means and this potentially
30:25 better value now than it was but you
30:26 know I mean what was it
30:28 $5.99 799 or something when it first
30:31 started you know very very inexpensive
30:34 and it’s worked its way up there since
30:36 and you know that people at that price
30:40 said I even if you know I mean trillion
30:43 find something to watch them here will
30:45 try it for $7.99 a month whatever you
30:48 know so they they penetrated the market
30:50 stole market share away from the cable
30:52 companies or the movie theaters
30:55 potentially or you know the the whole
30:57 gamut of different sub interest
31:01 industries that they compete against
31:09 you know Google Fiber did this I don’t
31:14 know what that’s priced at now but you
31:17 know if this was back when it first came
31:19 out and they had gigabit an Internet and
31:21 you know it was absurdly inexpensive I
31:25 think they kicked it off here not far
31:27 from me and was it Topeka or Kansas City
31:30 Kansas or something like that and you
31:34 know yeah in order to get people to try
31:36 it they went with the low price and I
31:38 would imagine the price has gone up
31:40 since then so you know any any business
31:46 that uses a low introductory price is
31:51 using penetration pricing strategy
31:56 so a strategy that runs in contrast to
32:00 that is skimming pricing okay now when
32:04 you see this used as when research and
32:07 development or costs or just the cost in
32:12 general of bringing a product to market
32:14 are high okay so there was a lot a lot
32:18 of a lot a lot of capital expended
32:21 before this product was even able to be
32:26 offered for sale okay so so the
32:29 reasoning is we’ve got to charge a
32:32 pretty high price just you know we’re
32:35 not we’re not gonna make as many sales
32:37 as we potentially could but we you know
32:40 we need to make big sales to get big
32:42 money coming in to recoup those costs to
32:45 get closer to breaking even you know do
32:49 to make some big strides towards
32:52 breaking even and then as time goes on
32:55 and you know the early adopters buy it
32:57 okay then you’re able to lower the price
32:59 a little bit and you know then people
33:04 are maybe you’re like okay it was this
33:07 now it’s this so that’s a bargain and
33:09 you to you know a few more customers and
33:11 so you’re selling more and your
33:13 economies of scale are getting better
33:15 and the price can continue to be lowered
33:18 and you know and for this particular
33:22 strategy and the businesses that use it
33:24 it’s often necessary to start lowering
33:29 that price because if it’s a rapidly
33:32 moving industry you know electronics
33:35 computer equipment whatever it may be
33:39 um you know you better you damn well
33:43 better lower that price because
33:44 something new
33:46 better fancier you know faster smaller
33:51 whatever it may be is is on the horizon
33:54 if is if it isn’t already there so you
33:57 know that the lowering the price isn’t
33:59 just to make a higher volume of sales
34:02 it’s like I said out of necessity
34:05 because what it is that you initially
34:07 brought to market it ain’t so cutting at
34:09 cutting edge anymore
34:10 okay so again this is a short term
34:13 strategy and like I said you’re selling
34:16 to early adopters and
34:17 it’s kind of the opposite of the
34:19 penetration pricing and you know it’s
34:21 the cutting edge technology you know
34:25 game systems with the recent
34:27 announcement of the PS 5 even though I
34:29 don’t think they priced it yet
34:31 that I’ve seen you know those gaming
34:35 consoles are always priced in that
34:36 manner with the skimming you know the
34:39 price their highest when they’re first
34:41 introduced and as time goes by that
34:43 price goes down and by the time there’s
34:45 a next-generation console out well
34:46 forget it you can pick up the second
34:50 generation console for pennies on the
34:53 dollar
34:58 trucking along here we’ve got
35:01 pre-emptive pricing and this is another
35:03 short-term strategy now this is one that
35:06 would be used by somebody’s already in a
35:08 market and is responding to a new
35:12 entrant into the market and what they’re
35:15 doing is the lowering pricing so it’s
35:19 similar to penetration pricing but again
35:24 they’re already established in the
35:26 market they’ve already got their market
35:27 share and they want to keep it okay so
35:29 now look in the game market share and
35:31 they want to keep what they got and you
35:33 see this used by monopolies and big
35:36 businesses they’ll even have lost
35:39 leaders in some instances you know
35:41 grocery stores who sell bread or milk
35:44 for a slight loss because you know they
35:48 the prospect of spending so little on
35:52 bread or milk is so irresistible to so
35:54 many customers well they’re gonna come
35:56 in for the bread and milk and they’re
35:58 just gonna do the grocery shopping there
35:59 because grocery shopping is a pain in
36:01 the ass they’re not gonna go to the new
36:04 grocery store and hang about it are
36:07 already at a grocery store you know they
36:08 just said that you know then they make
36:10 up the the lost margin on you know the
36:16 lost leaders with other higher margin
36:20 products or with volume and so what what
36:23 does I do you know of course that
36:24 discourages competition that discourages
36:27 the new guy the little guy from getting
36:31 into the market so this is a defensive
36:34 tactic basically and like I said not one
36:37 typically used by startups and some
36:39 examples you know it had it happens and
36:44 I mean I think Walmart you know their
36:45 grocery stores and it was Walmart of
36:47 course which is a little infamous for
36:49 this
36:49 I imagine Walmart still does it in some
36:52 respects but you know I they the example
36:59 I I found was a prescription prices
37:01 where they would sell some prescription
37:03 drugs you know sell them either at a
37:06 very low margin or as lost leaders and
37:08 you know prescriptions are can be a big
37:12 chunk of people’s budget and you know
37:15 the prospect of saving money on them is
37:17 like I said it’s irresistible well okay
37:20 so we’re gonna get our prescriptions
37:21 filled at Walmart and we gonna get back
37:23 in our car and drive a mile down the
37:26 road to go to the groats other grocery
37:28 store we just gonna do our grocery
37:29 shopping at Walmart you know well a lot
37:32 a lot of people you know and on my
37:35 mother she would she’d drive all around
37:37 town buying each individual item it’s on
37:40 sale from each individual grocery store
37:42 I think if if there were more than 24
37:45 hours in a day but most people are just
37:48 going to you know do the grocery
37:51 shopping there so you know I thought it
37:54 seems like such a kind of
38:00 I don’t know if sort of thing you feel
38:03 like is done all the time but I really
38:05 had our time find an example so I’m sure
38:07 there are more out there I’m sure it is
38:09 done and maybe it’s just not as
38:11 documented as easy as you might know as
38:14 you might think it is rather but anyhow
38:18 that it is pre-emptive pricing probably
38:20 not not something you’ll have to worry
38:23 about but something should be aware of
38:29 okay so cartel pricing we’re all
38:32 familiar with the word cartel and
38:36 you know the reason is you know because
38:41 this is sometimes how pricing is done
38:46 you know when they sell drug cartels
38:48 sell commodities of course you know
38:51 heroin you know heroin users not real
38:55 particular about their supplier as long
38:58 as the quality’s the same I’m
39:00 speculating here and not speaking from
39:02 experience and but you know drugs are a
39:05 commodity so it’s a it’s in essence a
39:09 gentleman’s agreement to keep prices
39:10 high so if you got two competitors it’s
39:12 like why sit here and fight on price you
39:17 know that just digs in to our margins if
39:21 there’s you know a few just a few of us
39:23 let’s just say you know nope this is
39:26 what we’re pricing it at okay and we’ll
39:29 compete through other channels you know
39:30 and drug cartels probably you know don’t
39:34 compete terribly fairly but in principle
39:39 you know like I said you would agree to
39:41 compete there other chance whether it’s
39:42 marketing or trying to lower your own
39:44 cost things like that you know to to get
39:49 an edge so it’s not a strategy that will
39:55 work with too many businesses in the
39:57 marketplace because you know between two
40:01 people two businesses okay three maybe
40:05 four
40:05 good luck five forget it you know I mean
40:09 I’m I’m you know speaking hypothetically
40:14 they’re you know the number it just
40:17 depends on them the business I guess but
40:19 the point being eventually if you have
40:22 too many competitors somebody’s gonna
40:24 take the easy road somebody’s gonna say
40:27 now I’m just gonna I’m gonna lower my
40:29 prices and try to steal market share you
40:31 know somebody will give in somebody will
40:33 cave and then that in turn forces all
40:37 the other market participants to do the
40:39 same thing so he got examples are OPEC
40:45 you know
40:48 drug cartels of course in the federal
40:51 reserve is in essence a cartel of banks
40:55 and Siemens in Europe and again I found
41:00 a link or references that example okay
41:06 so cost plus pricing this is a pricing
41:11 strategy that focuses purely on the cost
41:13 and it just adds a fixed percentage to
41:16 the cost of products or services so the
41:20 old legend was that Nebraska Furniture
41:24 Mart before Berkshire Hathaway bought it
41:28 sold it costs plus 10% and did a high
41:34 volume of business but this is still not
41:36 a pricing strategy I would recommend
41:38 recommend and you know Makana Cost
41:42 Accountant and
41:43 so I you know recognize the importance
41:47 of understanding your cost that this is
41:49 a kind of a lazy lazy pricing strategy
41:52 and cost by no means should be the only
41:55 factor to consider and when it comes to
41:57 pricing
42:01 examples that I found were cutting-edge
42:06 technology smart phones other
42:08 electronics
42:12 and that they were is a little hard to
42:14 find some more specific examples but
42:17 like I said there was a Nebraska
42:19 Furniture Mart I do remember that from
42:21 back when I read a lot of books on
42:23 Warren Buffett
42:27 okay so dynamic pricing this is a
42:34 flexible pricing strategy that changes
42:37 with demand so it basically prices go up
42:42 as demand goes down I’m sorry prices go
42:48 up as demand goes up excuse me
42:50 prices go down as demand goes down to
42:52 lure customers in and we’re talking that
42:56 these prices can change inside of a day
42:59 you know and so very quickly very very
43:03 dynamic it’s the name and you know a lot
43:07 of times you’re gonna need software with
43:10 a quality algorithm to keep up with
43:13 those changes in demand and to make sure
43:16 that you don’t get hosed and examples
43:18 are hotels and airlines
43:24 freemium pricing this is a combination
43:28 of the words free and premium premium
43:32 course and basically where you offer for
43:36 free a bare-bones version of your
43:39 product really just to kind of whet
43:41 people’s appetite give them a chance to
43:44 interact with it and see field like a
43:48 like a sample at a grocery store at
43:50 Costco or Sam’s or whatever and the goal
43:54 is of course to get customers to like it
43:57 your little free taste test and then
43:59 upgrade to a paid version and it’s in
44:04 some essence more of a marketing
44:08 strategy than a pricing one but you know
44:11 I did include it in here because it’s
44:13 worth we’re thinking about and you see
44:15 this a lot with the software and
44:17 software is a service in particular
44:23 okay so we’re getting getting down in
44:26 nitty-gritty here to more hourly pricing
44:31 this is a pricing strategy that’s
44:34 exclusively for services you know it’s
44:39 where you trade time for money and it’s
44:41 not advised I wrote a post on my other
44:44 side invest some money calm about
44:46 business models and kind of the
44:49 hierarchy and which are the most
44:51 attractive and trading time for money is
44:53 at the bottom it is the least attractive
44:56 and it’s not advised because you can’t
44:59 scale you can’t make more time in the
45:02 day no matter how hard you try no matter
45:05 what you do and you know it’s some
45:11 people when they first get into owning
45:14 their own business is bookkeeping or
45:15 freelancers or that do that and it’s
45:19 it’s simple in some respects certainly
45:22 but you know it’s a it just puts a cap
45:25 on your success so it’s not recommended
45:27 and but examples and there are examples
45:31 that put employees because that’s
45:33 exactly what most employees do you know
45:35 those that aren’t on some sort of
45:37 commission or large bonus program trade
45:42 time for money you know it’s what I do
45:45 and it’s ill-advised it’s not why you
45:49 got into business for yourself I mean it
45:52 you know aside from the freedom and the
45:55 control of course but you know
45:59 focuses on input you know your time and
46:02 labor or someone or another employees
46:04 time and labor it’s the same you can’t
46:06 create any more hours in the day for
46:08 other employees either but it focuses on
46:11 that input rather than the output that’s
46:13 the value received by your customer so
46:15 again not an advised strategy typically
46:19 but you know you have to be we’re aware
46:23 of its existence
46:29 project pricing is kind of the opposite
46:32 of hourly pricing and it’s also
46:34 exclusively for services because it’s a
46:37 flat fee charge for a deliverable it
46:41 might include you know products in there
46:47 too in terms of the pricing so a may be
46:51 exclusively for services but it’s
46:54 typically a services pricing strategy
46:57 for services and similar the value
47:00 pricing you know the fee you charge is
47:03 for deliverable and it’s hopefully based
47:06 on the value received by the customer
47:08 for that deliverable and it focuses on
47:11 the output you know the customers value
47:12 received rather than the input time and
47:14 labor some examples that do this it can
47:18 be done with some of the other examples
47:19 bookkeeping freelancing and that but you
47:23 know other examples are consulting
47:25 contractors and freelancers like I said
47:30 they can do it too so alright those are
47:33 the pricing strategies and I’ve been
47:36 going on for a while here but keep
47:41 pushing along and
47:45 talk about a little bit now about some
47:46 factors to consider when you’re talking
47:50 about pricing and some of those main
47:54 factors to consider are costs your
47:56 customers competitors new products and
47:59 market segmentation segmentation rather
48:02 get into that here so costs and pricing
48:07 I said cost plus is not typically a
48:13 recommended strategy but it is critical
48:16 that you understand your cost okay so
48:19 again just because I say cost less is
48:21 and how you want to pry something
48:22 doesn’t mean you can just be willy-nilly
48:24 with understanding your costs critical
48:26 that you understand your cost you want
48:28 to get as accurate as possible knowledge
48:32 of what each product and service cost
48:34 you deliver to customers okay so you
48:36 know your true margins and keep in mind
48:38 cost is more than labor and materials
48:40 there’s overhead there’s sgna expenses
48:44 and there’s just the manner in which you
48:46 allocate costs okay there’s a lot it’s
48:48 there’s no cut and drying method for
48:50 doing that some are going to be better
48:52 than others
48:53 some are gonna be more accurate than
48:55 others is what I mean an activity-based
48:58 costing I’ve got a page on that on the
49:02 website and you know that’s a generally
49:07 regarded as a well it’s certainly more
49:10 accurate than just generic costing but
49:15 excuse me it’s also a very heavily
49:18 involved process so not to be taken
49:23 lightly but if it’s done and with some
49:26 with some sense and taking seriously and
49:29 seeing through can provide some good
49:31 insights okay so you know the other
49:34 thing about constitu is categorization
49:36 ok that’s important with whether you you
49:40 understanding what of your costs are
49:43 fixed and what are variable because this
49:44 is gonna impact your operating leverage
49:46 you guessed it another subject I have a
49:50 post on on the website and you know
49:53 operating leverage to use the hi fix use
49:56 of five high fixed costs is
49:58 it gives you the ability to learn
50:02 extraordinary returns if you can sell
50:04 enough
50:05 okay so customers ultimately when it
50:09 comes to pricing your customers have to
50:10 buy in okay you have to understand what
50:15 they expect in terms of customer
50:17 services quality and of course pricing
50:20 and you know customer service and
50:25 quality aren’t gonna affect your cost so
50:27 it’s kind of a circular circular sort of
50:30 thing a feedback loop and you want to
50:32 know your customer avatars I talked
50:34 about that on some of my business plan
50:37 posts particularly and get down here
50:41 some of the earlier ones what is it yeah
50:47 business plan demand talks about
50:49 customer avatars and that’s basically
50:51 the demographic makeup of your customers
50:54 you know that you’re kind of in terms of
51:00 gender age income all those demographic
51:05 factors what you’re you know who your
51:10 customers are so you want to know them
51:12 okay you wanna know what compels them to
51:14 make purchasing decisions and beyond
51:16 that you want to have a firm grasp on
51:19 your unique selling proposition
51:20 something I’ve written about on invests
51:23 the money website and you know this is
51:27 basically what makes you your business
51:29 unique okay and this is how you separate
51:33 yourself from your competitors and you
51:35 know can can then charge what charge
51:39 your best price
51:42 competitors you’re gonna want to do
51:44 little detective work on on them and
51:48 understand you know how they position
51:50 themselves with strategies they use how
51:53 much do they offer in terms of customer
51:55 service and quality and what is their
51:57 unique selling proposition okay because
52:00 you know your customers are making
52:02 choices between you and competitors you
52:05 want to understand who you’re up against
52:07 okay you want to you want to do your
52:09 scouting report
52:12 so new when it comes to new products and
52:14 pricing and in this case we might be
52:16 talking new to you not the market and
52:20 you know a lot of times you do want to
52:23 come out of the gates and try to capture
52:25 market share quickly and have a high B
52:27 through penetration pricing strategy but
52:30 it depends on the market saturation
52:32 depends on the sophistication the
52:34 competitors whether that’s the strategy
52:36 you have to adopt but again I want to
52:40 remind you that is a short-term strategy
52:43 it needs to be part of a larger plan and
52:45 larger plan you know when it comes to
52:48 new products to don’t discount the value
52:50 of transparency and authenticity with
52:52 your customers you know when especially
52:56 if you’re making direct sales you know
52:59 why are you charging what you charge
53:01 okay a customer like might like that you
53:05 know they understand you’ve got to make
53:06 a profit and you know if they get taken
53:10 care of and feel like they’re in good
53:12 hands they’re a lot of times might be
53:15 willing to pay a little higher price and
53:18 you know they they appreciate you being
53:20 upfront and really given them the
53:24 information they need to compare the
53:27 value proposition between you and the
53:29 competitors so you know don’t as a rule
53:34 of thumb
53:34 yeah B be transparent in that respect I
53:37 think your customers will probably
53:39 appreciate it and then market
53:43 segmentation pricing I touched on this
53:46 earlier you know not all your customers
53:50 are the same different avatars other
53:52 differences that could really affect the
53:54 cost that’s needed to serve those
53:56 customers geography the amount they buy
54:00 and the timing of the sales you know did
54:04 they buy off and do they buy in peak
54:07 season not peak season things like that
54:09 okay so we’re not talking about price
54:11 discrimination here charging essentially
54:15 the same customer customers to different
54:19 customers to different prices no I mean
54:21 we’re talking about real things that
54:23 effect you know that you can justifiably
54:26 charge different prices for so don’t you
54:30 know depending on your business don’t
54:32 just make a blanket
54:35 prices pricing strategy you know think
54:37 about is it are there certain customers
54:40 that you could and should charge more
54:42 because they cost more to serve because
54:44 you know they’re getting a higher value
54:46 whatever it may be last thing we’ll
54:51 touch on here before the pricing tool is
54:57 the business plan and pricing okay so
54:59 like I said this is part of a bigger
55:02 series on business plan in particular
55:07 you know market research for a business
55:09 plan and you know pricing effects market
55:14 research of course who your competitors
55:16 are gonna be and it’ll affect the demand
55:20 you know demand and pricing are more you
55:25 know generally speaking inversely
55:28 related though you know that can be
55:30 worked around pricing will affect your
55:33 market size your serviceable available
55:35 market and the serviceable obtainable
55:37 market what you charge in price might
55:41 affect the location of your business
55:42 okay some locations are going to be more
55:44 conducive to higher prices and/or lower
55:47 prices the demographics where you are
55:49 you know he you got to think about that
55:52 again depends on your type of business
55:56 it might affect how you calculate market
56:00 saturation and I think that was my last
56:03 post on
56:05 market research yep market saturation
56:07 okay
56:09 and not post talk about finding and
56:12 setting a benchmark okay as you’re
56:14 researching for your business plan or
56:17 just for your annual planning you know
56:23 your pricing will affect what you choose
56:26 your benchmark and number four will
56:28 determine you know how Sacchi
56:32 saturated the market might be it’ll
56:35 affect your marketing of course and
56:37 it’ll affect your financial projections
56:39 of course you know your budgeting
56:42 capital budgeting operating budgeting
56:45 and financial budgeting and all of your
56:49 income state or all of your financial
56:50 statements income balance sheet and cash
56:52 flow okay
56:57 let’s talk a little bit about tool for
56:59 pricing I will put a link in the
57:01 description and this tool and there’s a
57:05 little snapshot of it
57:06 now I’ve got it up here so I can
57:09 directly reference it too but it’s in
57:12 the slides there and it’s inspired by
57:15 something called a Van Weston dorp as a
57:18 price sensitivity meter or just price
57:21 sensitivity meter for short
57:24 Dutch fellow I think came up with it and
57:28 what you’re doing in essence when you
57:31 use this tool you’re answering four
57:33 questions for a range of prices so for
57:37 for every price
57:40 in this range or not you know not every
57:43 price to the penny but you know for a
57:46 bunch of different prices you’re
57:47 answering four questions okay
57:49 these questions are what percentage of
57:51 people would question the quality of
57:53 this product or service at these prices
57:56 okay
57:57 ie they would think it’s too cheap
57:59 something’s wrong with it
58:00 it’s none nothing worth a damn is going
58:04 to be this inexpensive okay what
58:07 percentage of people would think that
58:08 the product or service is a bargain at
58:10 these prices okay so another way of
58:14 thinking that is it’s not expensive it’s
58:16 a bargain alright for each of those
58:20 prices what percentage of people would
58:22 think this product or service is getting
58:24 expensive so it’s no longer a bargain
58:26 it’s just it’s starting to get any
58:29 expensive range okay and what percentage
58:33 of people would think this product or
58:35 service is too expensive to these prices
58:38 ie that one doesn’t need an ie too
58:42 expensive too expensive you know what
58:44 that means I know what that means
58:48 okay so those are your four questions
58:50 and so when you answer these four
58:52 questions over a range of prices okay so
58:56 right here see here we got our range of
58:59 prices and we’re answering this question
59:01 the percentage of people that would
59:04 think
59:07 you know that would answer these
59:09 questions as follows
59:11 or is it shown over here at these prices
59:13 and shown here and what that does is
59:16 graph it out for you and then this well
59:19 I put in the table here to give you the
59:21 exact number but then you can see it on
59:22 the graph too and each of these points
59:24 where they cross provide you with the
59:27 information okay a couple of links real
59:33 good links at the bottom there on this
59:37 subject so like I said provides pride
59:44 the graph and the table provides pricing
59:47 insights and ideas and a what’s known as
59:50 a range of acceptable pricing okay so
59:53 the intersection of lines what do they
59:55 tell you all right
60:07 and I didn’t do this right well I’ll
60:09 tweak this table okay so we’ve got
60:17 marginal cheapness okay and if you’ve
60:22 ever watched my videos before which you
60:24 probably haven’t because not many people
60:25 have but you know I’m not above tweaking
60:29 a table on the fly here
60:43 okay
60:51 okay so the first one here we’re
60:53 questioning quality and getting
60:55 expensive intersect this is known as the
60:57 point of marginal cheapness okay or PMC
61:00 it means that any lower of a price could
61:06 mean that you’ll lose too many sales to
61:07 a perceived lack of quality okay so you
61:14 know there are there are basically
61:17 already quite a few people who think
61:19 that the product is cheap bordering on
61:22 too cheap so lowering it anymore
61:24 in theory isn’t gonna give you a bigger
61:28 volume of sales to offset the people
61:32 that just won’t buy it because they
61:33 think it’s not worth a damn okay so the
61:37 next point the optimum price point is
61:39 they call it and doesn’t mean you have
61:40 to choose this price point it’s just
61:43 this name is where the same percentage
61:48 of people and this is hopefully a low
61:50 percentage of people
61:52 feel the the product or service is too
61:55 expensive and they think the quality is
61:58 questionable okay so you’ve got both it
62:00 this is where both extremes intersect
62:02 okay but where they intersect this hope
62:06 again hopefully a low percentage because
62:08 these people aren’t going to buy in
62:11 either instance because they’re gonna
62:13 either question the quality or they’re
62:15 gonna think it’s too expensive its
62:18 overpriced so it’s the point you’re
62:20 minimizing those extremes okay the next
62:29 one is indifference price point where
62:32 bargain and getting expensive
62:44 intersect
62:50 so here this is the same hopefully high
62:53 percentage of people are in that middle
62:57 ground okay where a lot of them and and
63:01 this is the one where I see the most
63:03 kind of people who’ve written on it
63:05 recommended that you get your price if
63:07 you’re you know again I’d take
63:10 everything into consideration but this
63:12 is a good starting a point okay
63:14 ironically not the quote unquote optimum
63:16 price point just what they were named
63:18 and you know and I guess the name stuck
63:21 but the rationale changed over the years
63:23 it’s kind of an old model but so it’s
63:28 the same again hopefully high percentage
63:30 of customers feel the product is it’s
63:31 just starting to get expensive and same
63:35 percentage of people think it’s a
63:36 bargain okay so these are the people
63:39 they’re gonna make purchases all right
63:42 so that you know again this is where
63:48 potentially you would have the highest
63:50 volume depending on the quality of your
63:51 information and if finally the last one
63:54 is the point of marginal expensiveness
63:57 okay so bargain and too expensive where
64:00 those lines intersect
64:07 so it’s basically the same as the point
64:13 of marginal cheapness just flipped on
64:16 its head you know it means any higher of
64:18 a price you
64:21 you know you just gonna see too big of a
64:24 drop-off in in demand to to really help
64:32 your sales okay if it gets any more
64:35 expensive demands probably gonna fall
64:37 off and there just aren’t enough people
64:39 that feel that this is you know beyond
64:45 this point and there aren’t a big
64:48 percentage of people they’re gonna feel
64:49 that you know that either this is
64:56 a bargain or even getting expensive you
65:00 know beyond this point a lot of people
65:02 are gonna start to think it’s too
65:03 expensive too many people okay so you
65:08 know you you do that you fill this
65:11 information out you know the
65:13 intersections are over here on the table
65:15 you can see the prices but for
65:17 everything I entered up here here’s our
65:19 point of marginal cheapness eighty four
65:22 ninety nine any less than that so many
65:24 people are gonna think that it’s junk
65:26 and it won’t buy it the demand will be
65:29 there you know we got our optimum price
65:31 point ninety three thirty two and down
65:36 here we’re same percentage of people or
65:39 if the question quality and think it’s
65:41 too expensive that’s where the extremes
65:43 are minimized okay we got our
65:45 indifference price point here where our
65:48 moderate our purchasers are maximized
65:50 percentage-wise
65:51 that’s a $115 and then we got our point
65:56 of marginal expensiveness beyond this
65:57 too many people are going to think it’s
65:59 too expensive the demand won’t be there
66:03 so yeah like I said they and their
66:08 sections are over here and we’ll go over
66:10 how to use the table here next
66:14 almost done two more slides hang in
66:17 there I’m trying to hang in there myself
66:19 been going on an hour in six minutes
66:21 ended up my videos always go longer than
66:26 I anticipated but you know it’s a labor
66:29 of love
66:30 sure selling a labor of monetary reward
66:34 but nem okay how do you use the price
66:38 sensitivity meter well if you can
66:41 conduct an actual survey of customers or
66:43 get your hands on that information
66:44 otherwise and great use it okay
66:49 if you can’t do that
66:53 indefinitely research it further if
66:55 that’s the path you’re gonna take cuz
66:57 you want to understand the wording of
66:58 the questions there’s ill you know it’s
67:00 kind of an art unto itself okay
67:03 obviously I’m using a hypothetical
67:05 example here and just speculated but um
67:10 you know if you don’t if you don’t think
67:12 you can practically conduct the survey
67:14 or get this information from potential
67:15 customers then you have to speculate so
67:19 first thing you do is enter the average
67:21 or medium price you know take them
67:24 whatever the first price that comes to
67:26 mind
67:27 okay this doesn’t have to be exact and
67:29 enter it right here in h2 okay so from
67:31 there it’s going to calculate down to
67:34 zero and it’s gonna calculate up give
67:37 you a range of prices up to double the
67:39 price okay that’ll happen automatically
67:45 again I’ll make the point if you’ve ever
67:48 used any of my other tools you know the
67:50 white cells okay that’s where you put
67:53 information in shaded cells have
67:55 formulas okay so don’t type over them
67:57 type in the white cells and excuse me
68:01 you’ll be good to go
68:05 okay so for each question and are the
68:07 percentage of customers who would or you
68:09 think would agree so at zero well it’s a
68:16 hundred and a hundred okay so we’re
68:18 going to say
68:21 everybody would question the quality at
68:24 zero and by default everybody would
68:28 think it’s a quote unquote bargain there
68:31 and you know this just has to do with
68:34 if you enter zero here well first of all
68:38 it’ll give you an error okay because it
68:40 kind of violates the rules it’s
68:44 less people are always gonna question
68:46 the quality then think it’s a bargain
68:47 okay less people are always gonna think
68:51 it’s too expensive and think it’s
68:53 getting expensive okay so me describing
68:57 it I might not do it justice
69:01 if you tinker around with this a little
69:02 bit I think it’ll it’ll become intuitive
69:05 you know it just takes a little getting
69:06 used to and it’s you know in essence you
69:09 want your lines like this so like I said
69:11 this question quality is the blue line
69:13 here is always less than the red line
69:16 alright because you know this is worse
69:22 than bargain
69:24 okay so fewer people are gonna think
69:26 that conversely too expensive it’s
69:30 always gonna be fewer people and think
69:32 it’s getting expensive okay and you see
69:35 the lines sloped down this way for the
69:37 bottom to slope down this way for the
69:39 top so again there’s logic worked into
69:42 the table here where you can’t go from
69:44 oh well ninety percent people question
69:47 quality at twenty but ninety five are
69:49 gonna question it at forty well that
69:51 wouldn’t make sense okay why would more
69:53 people question the quality of forty
69:55 dollars than would at twenty twenty is
69:57 less than forty so if you try to do that
70:01 that it’ll say no no violates the rules
70:06 try again and that’s just to keep you
70:08 from entering information that you know
70:14 would basically render the tool useless
70:16 so I put that in there for your own good
70:18 you know and particularly as you’re kind
70:20 of like getting used to it tinkering
70:22 with it
70:25 you know it it just helps got as kind of
70:29 a check they’re just like hey you know
70:31 that’s not what you want to do and like
70:32 I said you’ll get used to it and you’ll
70:33 you’ll understand become a little more
70:35 intuitive to you that at first glance it
70:38 if you’re just watching this video it
70:39 might not be but again I would encourage
70:40 you to download it try it a little bit
70:43 and read up on it some more you know
70:45 they there might be a damn good
70:49 possibility someone else explains it
70:50 better than I do okay so talk a little
70:54 bit about the the logic here question
70:57 quality and bargain must be equal or
71:01 decrease as the price increases okay
71:04 price goes up fewer people are gonna
71:07 think it’s a bargain fewer people are
71:08 gonna question the quality you know
71:11 question quality it means that it’s so
71:14 low something must be wrong with it
71:16 why are they trying to give this away
71:20 okay conversely getting expensive and
71:24 too expensive must be equal as the price
71:27 increases or increase okay as the price
71:32 increases more people are gonna think
71:33 it’s too expensive more people are gonna
71:35 think it’s getting expensive all right
71:37 it’s pretty straightforward okay so the
71:40 percentage that question quality must be
71:42 equal to or lower like I said earlier
71:44 than think it’s a bargain
71:45 if you were you know this is a worse
71:52 description okay you know so there’s
71:57 always gonna be fewer people that think
72:00 that or there has to be in terms of this
72:04 within the context of this tool you know
72:08 anything’s possible but you know like I
72:11 said this is just kind of the logic that
72:12 you have to use to be able to get get
72:14 anything from this tool because if you
72:15 throw this logic out the window then the
72:17 tool is useless and you know so
72:23 and I touched on earlier so the
72:24 percentage that feel it’s too expensive
72:25 must also be equal to or lower than the
72:27 percentage to feel it’s getting
72:28 expensive fewer people are going to
72:30 think it’s too expensive I think it’s
72:32 just starting to get expensive game
72:35 trechie present prevents this logic can
72:38 be violated your
72:44 losing point of marginal cheapness
72:45 optimum price point indifference price
72:47 point and point of marginal
72:48 expensiveness are automatically
72:50 calculated and the graph is
72:51 automatically updated so for example
72:56 like if we take this and say this the
73:01 question quality it was 15 10 5
73:08 you see a little bit see the graph
73:11 change down here and then with some of
73:14 those first edits he saw the price the
73:18 point of marginal cheap cheapness change
73:20 see it jumps okay because it changes all
73:26 right so it’s the same as you you know
73:28 particularly as you get to update and
73:29 these values in the middle that’s where
73:30 you gonna see these changes in the
73:32 prices but you’ll see the graph a bit II
73:36 no matter where what changes you make
73:39 some ok and went on our fifteen seventy
73:45 five minutes yeah
73:46 it’s a long one I’m done you know I did
73:51 included this slide in with mostly with
73:54 my quickbooks online videos and it
73:59 doesn’t directly apply here but i
74:00 slipped it in anyways and you know
74:02 depending on where you’re at with your
74:03 bookkeeping if you DIY in it and you
74:08 hate it and you know you want to work
74:13 more on your business than work in your
74:14 business and do less data entry because
74:17 you think that’s boring and you’re right
74:19 then check out bot keeper you know they
74:23 use AI to automate your bookkeeping
74:25 tasks they can do it in quickbooks
74:27 online and like i say gives you the
74:29 opportunity help your business grow it
74:32 spend less time on menial tasks and
74:35 there will be a link down in the
74:37 description for that
74:41 okay that’s all I got man if you stuck
74:45 with me thank you hope you found some
74:48 value there some things to think about
74:50 and like I said pricing is a complicated
74:53 manner but when we’re spending time on
74:57 check out the tool try it again I you
75:00 know don’t let spreadsheets scare you I
75:02 try to make my spreadsheets as
75:04 simplistic as possible and give you the
75:07 documentation you need to use them and
75:10 get value from them because that’s what
75:11 they’re there for
75:12 you know so any you know the old and
75:17 it’s an old saying I’ve only seen it
75:19 said once and I thought it was great
75:20 though they said you know better to make
75:23 mistakes in a spreadsheet then in real
75:26 life you know when I’m not doing the
75:28 quote justice but something like that
75:30 but I am I’ll leave you all with that
75:33 thanks for watching
75:35 take care

Pricing strategy example

As has been customary for my business plan posts, I’ll be trying to apply what write about (or record, in this case).

I’ve been using a startup that seeks to manufacture an all-natural topical hair regrowth treatment for my examples thus far. Though the previous post on market saturation called the viability of that idea into question – I’ll continue to use it for consistency’s sake.

As far as pricing strategies go, I knew I wanted to use psychological pricing – because why not? If it convinces a few more people to buy than would have otherwise, it’s worth it.

Also, due to the nature of the product (vanity) I always figured that premium pricing would be appropriate. Not excessive, but I knew I wanted to price on the high end. Again, I can always run promotions.

I also wanted to be mindful of value. This is, admittedly, not a miracle product. It’s just a supplement. If it cured all hair loss, I could charge just about any price for it. But, it doesn’t. So, I need to be mindful of just how much value I’m providing.

With those strategies in mind, I went to Amazon and searched for competing products. I did this for both men and women because I thought it would be smart to price those customer segments differently. I could make slight tweaks to the formula to justify the difference in pricing.

I thought that a women’s hair regrowth product would be priced higher. The reason I thought this was because of the (surprising) preponderance of women concerned about hair loss. I was wrong, however. Women’s hair regrowth products tended to be priced lower than men’s.

After getting a feel for the pricing for each segment, I plugged my assumptions into the Price Sensitivity Meter.

Here’s what I came up with:

Men’s pricing: $35.49 for a one-month supply.

mens product price sensitivity meter
Click to enlarge

Women’s pricing: $29.49 for a one-month supply.

womens product price sensitivity meter
Click to enlarge

5 Pricing Strategies | Gain Market Share for Your Small Biz

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5 pricing strategies featured

Competitive, premium, value-based, skimming, and penetration are five of the most used strategies in pricing goods and services.

Price is an extremely important factor for consumers. In fact, it is the number one factor in deciding where to buy. Pricing products properly is essential to obtain good financial results and still guarantee profit for your business. Today, consumers can buy from wherever they want, whether through online stores, apps, social media, etc. In addition, they can also compare prices using Google Shopping or specialized price comparison sites. The point is, buyers are smarter, so you also need to be. For this reason, consider the following strategies for attracting customers and increasing sales.

How does the customer evaluate the price?

Before we talk about pricing strategies, you need to understand how the consumer evaluates this variable. It’s not just the numbers on the label. There is a subtle difference between the price of your product and the value it has. It is the comparison between these two factors that will make your customer assess whether the merchandise is priced low, high, or fair.

The price is the investment made by the consumer in the purchase of this merchandise and involves the cost of production, taxation, profit margin, and operating costs.

Unlike price, value is not based on numerical data, but on subjective aspects of the consumer. The value refers to the extent to which a product meets the customer’s needs and the benefits that the customer perceives in the merchandise compared to the investment he will make at the time of purchase. Value is what makes customers willing to pay twice as much for a certain brand in relation to another with the same specifications.

Therefore, it is important to ask yourself what is the benefit that a customer sees in your products and how much they are willing to pay. With that in mind, consider the following pricing strategies.

1) Competitive pricing

This strategy relies on competition to define the final price of the product. This is common when your product or service differs very little from that of your competitors. Therefore, you adapt their price. Companies competing in a highly saturated space prefer this strategy, as the slight price difference may be a factor influencing the decision for buyers.

With this strategy, you can price your product slightly cheaper than your competitor’s, use the same price as your competitor’s, or set the price slightly more expensive than your competitor’s. Note that there is always a market leader that sets the standard, and competitors follow it.

The objective of the competitive pricing strategy is to increase the number of customers or increase market share by attracting customers from competitors. However, keep in mind that no matter what price you have chosen, competitive pricing is a path that will help you stay ahead of your competitors and dynamically maintain your pricing.

2) Premium pricing

This is a pricing strategy where you set the price of your product or service above the normal market price. This can make consumers think that your product has something special and of greater value than those offered by your competitors. Although this pricing strategy may make other consumers not buy from you, that’s okay. Because one of the premises of this strategy is that higher-priced products create a different perception of the market.

However, you should study your product and think about why it should be more expensive than others in the same category. It does not make sense that you raise the price of a product that does not really meet consumer expectations, or that the competition offers one that surpasses yours at a lower price.

3) Value-based pricing

A value-based pricing strategy is when companies price their products or services based on the consumers’ willingness to pay. In short, the price is set according to the perception of the buyer’s value on the product. Here, even if a product is assigned a higher price, consumers will still be willing to buy the product. However, it is difficult to measure the value that customers attach to a product. Therefore, you must work to establish the correct estimates.

If used correctly, this strategy can boost customer trust and loyalty. Likewise, it can help you prioritize your clients in other facets of your company, as well as marketing. On the other hand, the value-based strategy requires that you know your customer avatar well.

4) Price skimming strategy

Skimming pricing is the setting of a high price for a product or service in the initial period of sale and gradually reducing the price of that product or service later. This is done to reach more general consumers.

One of the biggest benefits of using this pricing strategy is that it allows businesses to maximize profits thanks to so-called early adopters. Lowering the price end up attracting those consumers who are much more sensitive to the price of a product or service. This strategy is suitable for products that have a short life cycle, such as those that are really trendy.

Before implementing this strategy, you should first understand the following:

  • The strategy will be more effective when there is little competition (when you enter, you lower the price gradually)
  • You can implement this strategy as long as your product or service has the necessary quality to be able to be purchased at a high price in its introduction phase
  • Being a more expensive product, in the beginning, you need to target a segment of the population that has a higher economic profile

5) Penetration pricing

Penetration pricing is the initial low price setting for a product. The goal is to set a price to get a large group of customers interested in buying. When the products’ sales increase, the price is returned to the same level as the competitors.

Penetration pricing is suitable for products that can replace other products. For instance fast-moving consumer goods such as vegetable oil, detergents, soaps, toothpaste, instant noodles, and so on.

As for the progressive rise in prices, be very careful. You will have to take great care of the volume of these increases. If they are drastic, you will lose many customers as fast as you have gained them.

Clear examples of this pricing strategy were used by Netflix and Amazon.

Both offered quite affordable prices for great service, and have recently raised their rates. However, they have become necessary in our lives, and we consider that even with the rise, the price is still affordable for what they give us in return.

In principle, this strategy can make you known in the market and attract buyers, but it can also hurt your bottom line. Therefore, you must know your costs (and margins) so as not to incur losses.

StrategyProsCons
CompetitiveGain market shareLower margins
PremiumHigher marginsHigher cost + quality
Value-basedCustomer satisfactionDifficult to measure
SkimmingHigher (initial) marginsOnly for certain products
PenetrationGain market shareLower (initial) margins

Important tips for defining pricing strategies

These pricing strategies, when thoughtfully applied, have the power to attract customers to your business. However, it is important to evaluate other aspects before changing the prices of your products or services. So here are some tips to help you at this point:

Pay attention to your costs

Even with the increase in demand, reducing the prices of your products without observing the costs of production and acquisition of your merchandise can cause serious losses to the business. So, evaluate this information well when setting pricing.

Define your strategy in relation to the competition

Before setting a price, it is important to check how your company wants to position itself in front of competitors. Does your company want to offer more for the same? More for less? Or more for more?

Try not to set high prices for products of lower quality than those offered by competitors. This is the worst pricing strategy that your company can adopt.

The low price does not retain customer loyalty

A low price may attract more consumers, but that is not what will turn them into loyal customers. It is necessary for your small business to set itself apart and make consumers return. To distinguish itself through the agility of employees, the quality of service, or the environment of the establishment.

Count on the right tools

Price is an extremely dynamic variable. Controlling and managing all this through spreadsheets can be cumbersome and is prone to human error.

Software exists that can optimize your price management process. Find the tool that best suits your needs and makes your routine easier.

A guide to the five main pricing strategies

These are pricing strategies that can be applied in every business. Each strategy has its advantages and disadvantages. So, you must weigh those pros and cons.

Don’t limit yourself to using only one of these strategies. Combine them, and mix as many strategies as you require. This will help you find the one that guarantees sales, the flow of consumers, and positive results.

https://youtu.be/1MuvyoU2ueY

Calculating Market Saturation for Your Business Plan

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market saturation featured

Market saturation is a measure of the amount of supply for a given level of demand. The more supply, the greater the amount of saturation. All things being equal, the more saturated a market is, the more difficult it could be to compete. Calculating and understanding market saturation will help you as a small business owner create strategies that will help you succeed.

Market research for your business plan is obviously critical. In addition to analyzing demand, market size, economic indicators, and location you’ll also want to know how much and what type of competition your face. You want to know how saturated your market is.

This is all a lot of work. But, I feel it’s important to help you stay competitive. Not only when you’re writing your business plan, but throughout the remainder of the life of your business. Understanding your customers and your competitors will help you to be more successful.

More market saturation can mean a smaller market share

Market share is exactly what it sounds like. It’s your share (percentage) of the market for your company’s goods and services. That’s the simple explanation.

What’s considered your market and what goods/services you’re referring to it’s up to whoever is calculating the market share.

On my sister site, InvestSomeMoney.com, I have talked extensively about total available market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM). Of these, the SAM is what I would advise for you to consider when calculating market share.

Also, many businesses, probably yours even, sell a variety of products and or services. Therefore their market share might vary in terms of what they’re selling. It might be that they have a dominant market share in one category, and a poor market share in another.

Market saturation is a situation where there is no unmet demand for a given product or service. This can happen from businesses entering the market, businesses growing, or from demand shrinking.

The market can be saturated if there’s only one business in it. Of course, that’s referred to as a monopoly. In other markets, particularly those that deal with commodities, the market could be saturated due to an overabundance of competitors. So, the number of businesses in the market isn’t necessarily indicative of whether or not it’s oversaturated. Again, it has to do with supply vs. demand.

Strategies for competing in a saturated market

There are five basic strategies for combating market saturation. For more details on business growth strategies read this post on InvestSomeMoney.com.

Market penetration

Market penetration means taking market share away from competitors.

This can be done in a couple of different ways.

The first is pricing. Lower prices, all things being equal, can take customers away from the competition. As a new business, you might not have the cost structure or processes in place to make the margins that you need if you compete on price. Alternatively, you can raise prices and present your product/service as a premium offering. This can work if you can truly isolate what is it that makes your offering unique.

Additional value is another way to penetrate the market. A better experience, upgrades, and loyalty programs are a few ways to do this.

Market development

Market development means focusing on an unsaturated geographic area.

If your first choice for location is saturated, perhaps your second, third… whatever choice might not be. In fact, your business model might have market development worked into it by design. If your plan is to start a franchise or to market your products through a network of distributors, then you will be planning on developing new markets in the future

Product expansion

Product expansion is the creation of new products or services which don’t yet have a saturated market.

Creating a new unique product/service is one of the most effective ways to penetrate a new market. We all know the cliché about building a better mousetrap.

Your new product/service doesn’t necessarily have to be revolutionary. It can be a minor improvement to something that already exists. It can even be something that has extraneous and unnecessary features (without huge benefits) stripped away.

Diversification

Diversification is the combination of market development and product expansion.

Diversification is really just a hybrid of the above strategies. The combination of any two or more ways to break into a saturated market.

For instance, a franchise restaurant that offers a half chicken and half beef sandwich. That’s a silly example but it shows you what the combination of market development and product expansion might look like.

Acquisition

Acquisition is investing in another company in order to capitalize on their market share.

If you’ve got the capital, and the business plan, an acquisition, merger, joint venture, or alliance may be the way to break into a saturated market. In a case like this, you might purchase the sole vendor in town and open your own retail location. This would give you control of the supply and the costs. This control would put you in a strong position to increase market share.

How to calculate market saturation

First of all, before we begin, we should probably be pretty clear about what we want. Here’s a somewhat technical definition that we can use as a starting point:

Market saturation is defined by the relationship between supply and demand. Supply and demand for substitute products within a particular geographic area. The geographic area can be small, or it can encompass the entire world.

Alright, so what’s meant by that?

If the amount supplied by your potential competitors is greater than or equal to what’s demanded, then the market could be considered saturated. However, getting an accurate read on the supply and demand for a particular product/service can range from time-consuming to damn near impossible.

Don’t let that discourage you. The point of writing a business plan, in general, and calculating market saturation, in particular, is to think things through thoroughly. To look at your aspiring business and the environment it operates in as comprehensively as possible.

So, you’ll have to work with what you have. It might be a little or a lot of information. That’s more abstract than I like to be. But, that’s the way it is. Every industry/business is different. So, I, unfortunately, can’t prescribe any “one way” to calculate market saturation.

I can, however, give you some guidelines and provide an example…

Use a benchmark

Credit for this idea goes to this slideshow.

In this example, the market saturation of a casino in the Chicagoland area was analyzed.

It was compared to areas that were assumed to already be saturated with casinos. This was done through the use of ratios calculated with demographic and industry data.

casino market saturation comparison ratios
Credit: digitalscholarship.unlv.edu

The authors of this slideshow probably didn’t know the exact demand for a casino in the Chicagoland area. How could they? Even if they could survey every individual living there, the demand information they gathered might not be reliable.

So, they did the next best thing – they used a benchmark.

Now, St. Louis, Kansas City, et al. may or may not really be saturated with casinos. However, if Chicagoland’s ratios (machines per 1K adults, machines per $1B of disposable income, etc.) are more favorable, it probably doesn’t matter. From a market saturation standpoint, the Chicagoland area is probably more favorable for a casino. If the Chicagoland casino fails, it probably won’t be due to market saturation.

Start with what you know (or, at least, what you’re pretty sure of)

What’s something similar to your product/service that’s got a saturated market? Where’s somewhere similar to your business location that you’re pretty sure is saturated? These can serve as your benchmarks.

I would suggest that you refer back to your business plan demand analysis. In particular to the drivers of demand. Hopefully, these will give you an idea for the metrics to use for comparison.

In the casino example, demand drivers such as population (21+) and disposable income were used.

Once you have a grasp on the demand side of the equation, you’ll need some supply figures. Again, use the best information you can get your hands on. This may come from an industry publication, an internet search, or just information you already know. If all that fails, you might have to use a proxy, as I did below.

In the casino example, they used industry information on the supply side. Things like gaming machines/facilities and revenue.

With demand and supply information in-hand, you can now calculate ratios. Do this for your own business and for the benchmark that you know is saturated.

Compare the results. If your prospective business looks more favorable – great! You might not have to fight a saturated market. If things don’t look so good, don’t give up. Consider which of the above strategies you could employ. Or tweak your business plan somewhat.

Consider a soaking wet rag. It might be completely saturated and unable to hold any more water. If you add one more drop, a drop will fall off of it. Your business might be the drop that’s added, but that doesn’t mean it’s the drop that will fall off.

An example of calculating market saturation

As with all of my business plan posts, I’m going to work alongside you. For those who are new to these posts, my potential business is for a natural, topical, hair regrowth treatment.

Let’s start with a benchmark. Something that, I assume, has a saturated market. This took a little bit of thought.

I wanted to stack my potential product against something that everyone uses. A commodity that has a negligible amount of distinction between products. I also wanted something that had separate men’s and women’s versions.

So, I settled on “shaving razors.”

The supply of the benchmark

How many shaving razors are supplied, though? Almost impossible to say for sure. But, I thought that Amazon might provide some insight.

So, I did searches for:

  • “mens shaving razor” in the “men’s shaving & hair removal products” category
  • “womens shaving razor” in the “women’s shaving & hair removal products” category
mens shaving razor amazon results
Click to enlarge
Credit: amazon.com

For each search, I estimated the number of results (excluding sponsored results). I figured that, for a commodity such as shaving razors, nearly every company that sold them would offer them on Amazon.

Sure, substitute products and other unrelated items came up in these searches. But, since that’s the case across all my searches – it’s fine. It’s all about the relative number of search results, not the exact number.

Demand for the benchmark + results

Next, I needed to know the demand for shaving razors. I decided to use males 20+ and females 15+ in the U.S. as my population. That data was derived from this source.

Then, it was a simple matter of division. The demand (male and female shaving population) divided by the supply (Amazon.com search results) gives me a ratio that I can benchmark against.

Here’s what that looked like:

Population# search resultsPop ÷ results
Males (20+)119,000,8218,06014,764
Females (15+)136,348,7591,56087,403

This means, in theory, that 14,764 men could buy each and every search result for shaving razors. 87,403 women. Again, I know not every person in the U.S. buys their shaving supplies from Amazon. It’s just that ratio I’m after.

At this point, I don’t know if that’s good, bad, or neutral. In order to put things into perspective, I need to know what the ratio might look like for my product.

I’ll need the same basic information, just tweaked for my particular product.

For starters, I’ll refer back to my post on determining market size. Here, I determined that my conservative serviceable available market (SOM) was 680,293 males and 1,159,854 females. That’s my assumed demand.

Supply for my product

As far as supply goes, I’ll approach it from the same way. I’ll use Amazon, but I’ll, of course, perform a different search.

This time, I’ll search for “mens hair regrowth treatment” and “womens hair regrowth treatment”. Both will be in the same category, “hair regrowth treatment” since there is no distinct category for the two genders – as there was with shaving razors.

Though the first page of results pulled up very different products, the total number of results was the same – 1,092 for each.

womens hair regrowth treatment amazon results
Click to enlarge Credit: amazon.com

Without further ado, here’s the results:

Population# search resultsPop ÷ results
Males in SAM680,2931,092623
Females in SAM1,159,8541,0921,062

Conclusions

What’s this mean? Way less Population per search result. That’s bad news.

I thought shaving razors would be the saturated market, but (wo)men’s hair regrowth treatment blew that out of the water. Only 623/1,062 people could buy every result in this market. That’s compared to over 87,000 in the women’s shaving razor market.

It turns out that hair regrowth treatments might be the saturated market. Boring ol’ razors (and other shaving acessories) might be where the opportunity is.

The numbers didn’t get any better when I used my SAM population instead of SOM. Though the populations were considerably bigger, the Pop ÷ results still paled in comparison to shaving razors.

As I was prepping for this post, I wondered if this wouldn’t be the case. Reviewing the information in my post on determining market size, I saw then that I was potentially demand-constrained (as opposed to supply-constrained). I saw then that I could make way more than I could practically hope to sell.

Going forward

What’s that mean for my prospective business?

First of all, it means that I’m glad that I performed this analysis for my business plan and didn’t dive in head-first.

It also doesn’t mean that there isn’t a business here. I just need to digest this information, circle back to some of the previous steps, and tweak my plan accordingly.

How to Choose the Best Location for Your Small Business

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The Census Business Builder is a great tool to narrow down possible locations for your business. But, there are other important factors to consider like cost, competition, and capacity.

Why is location analysis important?

Location, location, location. This is often cited as the three most important factors in real estate. They’re also important for your small business too. Particularly if it’s a business that sells to the general public.

If your business doesn’t sell to the public though, that doesn’t mean that location doesn’t matter. You also have to consider your distance from customers, infrastructure, and other not so obvious things that can have an impact on sales and profit.

A business location analysis isn’t just important for your first location either. Yes, that might be the most important location analysis you undertake. But, it’s also important for your second, third,… whatever location.

So, what is a business location analysis?

It’s simply the gathering of location-related information, compiling it, and making the best decision you can. It may not be the optimal decision – which is okay. There are a lot of variables that affect the quality of a location. Probably more than you or I am capable of completely wrapping our heads around.

It is important to put your best foot forward though. If you give a business location analysis its time, you should make a good decision. Making a bad decision can result in costs (ownership or leasing) that are too high to support your level of business.

Remember, fixed costs aren’t necessarily bad. High lease payment can make sense if you’re in a location that’s going to make a lot in sales. Refer to this post on operational leverage to learn more.

A location analysis is vital for your business plan

Those who review your business plan are probably going to know how important location is. So, if you want to raise additional capital, or get a loan, you’ll need to address this important fact. You’ll need to make it clear how your location is going to contribute to your small business’s success.

Be prepared to answer why you’re choosing the location you are. what effect is this location going to have on your success? Take advantage of the tools available and consider the necessary factors. If you do, you’ll be able to confidently back up your location decision.

Factors to consider when doing site selection

Demographics of the area

When you think of demographics you typically think of descriptors for individuals. For example gender, income, age, homeownership, etc. Information like that is important, of course, if you’re relying on those individuals. Relying on them to purchase your products/services or to help sell them.

But, businesses also have demographics. So, if your small business is selling other businesses (B2B) – then you want to know the demographics of the nearby businesses too.

The competition

Where are your competitors located? Are they nearby? Or, are they in a completely different location? What advantages and disadvantages does their location have compared to yours? Do they know something you don’t? Or, maybe they didn’t think it through enough?

Nearby traffic

Traffic plays an important part in a business location analysis. If you’re selling to the people in those cars, and then you probably want to see more of them. That is, given that the local infrastructure can handle that volume of traffic. If it’s difficult to get in and out of your business, then all that traffic might be a deterrent for your customers.

Traffic also affects your employees. Depending on your geographic location, people’s tolerance for traffic might be different. If your location is going to be in a major metropolitan area, a lack of traffic might serve as something of an incentive to potential employees. If your location is going to be in a lesser metropolitan area, then being near the most congested traffic in the city might serve as a deterrent.

The local economy

Even if your business is based online, and you have minimal needs in terms of employees – the health of the local economy will still have a bearing on your business. Consider the economic implications of the different locations you’re reviewing.

Your business’ initial and ongoing location costs

As mentioned before, you need to make sure that the location you choose represents a good return on investment (ROI). Keep in mind what the initial location costs might be. So that you don’t spend too much before you’re even able to utilize the location.

Of course, you want to be cognizant of the ongoing location costs too. What the fixed costs will be and how they will affect your breakeven point and degree of operating leverage.

Will the location make business easier?

A lot of business revolves around the “numbers” making sense. But, there are human beings behind all those numbers. You being one of them. The best return on investment in the world probably isn’t worth it if it makes you, your employees, or your customers, miserable.

So, think about the intangibles. Don’t just quantify your analysis. Qualify it to.

Look at it from your employees’ perspective.

On the same token, how will the people working at this location feel about it? I mentioned traffic earlier, but there’s more to consider from the employees’ perspective. Are there places to eat nearby? Is this a part of town that employees will want to travel to?

Really try to look at this through your employees’ eyes. They don’t reap the same benefits that you, as an owner, do. If you were an employee, would you want to drag yourself to a job at this location day in, day out, year after year?

Adequate space and capacity considerations

It goes without saying that you need a building that facilitates the nature of your business. If you need warehouse space you’ll probably need loading docks. Or, doors that are big enough to drive a forklift in and out of.

If you have a computer-intensive business, you want to make sure that it has the broadband capability as you need.

Keep in mind, that you wanna look a bit into the future here. Don’t just think about what your needs are today or tomorrow, think about your best-case scenario. If your business grows faster than you anticipate, are you going to have the capacity to handle that level of business? Of course, don’t overspend just have a lot of excess space. Think of it as a balancing act.

An example of location analysis

As with most of my business plan related posts, I like to include an example. Previously, I had used my own aspiring business as an example. This business involves the manufacture and distribution of a topical hair thickening treatment.

I’ll rely heavily on the Census Business Builder (CBB) to narrow down a location. From there, potential locations can be qualified with some of the factors mentioned above.

Here’s a post I wrote on navigating the CBB.

Finding a location for a distribution center

As I mentioned in my Market Size for a Business Plan post, I would initially plan on outsourcing manufacturing. But, even though I’m not choosing where to locate a manufacturing facility, I may still need a location for distribution.

One of the potential manufacturers I found was in Florence, KY – which is near Cincinnati, OH.

So, on the CBB homescreen, I enter my NAICS code: 424210. Not because I’ll need it, in this instance, but because it’s required to get the map to come up. Then, I’ll enter Florence, KY as my location.

census business builder home screen
Credit: cbb.census.gov

Next, I’ll Select a Map Variable that will help in my search. My first thought is that I want my distribution center to be relatively close to the bulk of my customers – though I plan to eventually ship nationwide. This should help to keep shipping expenses down. So, I’ll use Consumer expenditures per household on Nonprescription drugs as my Variable.

I’ll also expand my geography out to the State level. I want to start broad and then narrow down.

census business builder state map
Credit: cbb.census.gov

As you can see, with the map centered around Cincinnati, the states represented in blue are those in the top quintile of spending on nonprescription drugs. Almost all of them stretch up the Northeast coast.

With that knowledge, I might start looking in Virginia. The closest of the high-spending states. Virginia is also, relatively speaking, closer to the West coast than the other states.

If I zoom in on Virginia and change my geography to County, I can narrow down further. Many of the counties are around the Richmond area and in Northern Virginia, close to Washington D.C.

What I’ll also do here is change my Map Variable. There isn’t one that details the average cost per sq ft of warehouse space (unfortunately). So, I’ll have to use something else.

I’ll use Average payroll per employee. I don’t want to hire just anyone, but I do want to keep costs manageable. So, I’ll focus on the second-lowest quintile ($34.7K – $44.3K).

Viola! I found it! Prince George’s County, Maryland will serve as a valid starting point for searching for a distribution center for my product. It’s not in Virginia, but it does seem to meet all of my initial requirements.

census business builder county map north virginia
Credit: cbb.census.gov

From here, I would search the web for available warehouse space and would qualify the choices with the factors listed above.

If I found another potential manufacturer, I could apply the same rationale to find more location options. Or, I could apply a completely different rationale. The steps I used to arrive at this location were just the first to come to mind. They aren’t necessarily the best.

Address potential problems with your business location

It’s best to get out in front of potential problems with your location. Just as it’s important to acknowledge your weaknesses and threats when doing a swot analysis. Think about how you’re going to handle your location’s shortcomings. Nearly every location has some.

Additionally, you want to acknowledge where your competitors are at. Consider the advantages and disadvantages of their locations.

Also, think about the best-case, most likely, and worst-case scenario. Just as I suggest you do with your annual budgeting.

How are you going to take advantage of the location? How are you going to overcome the shortcomings of your location?

Avoid picking a location just because it seems like a bargain. There’s more to consider than just the rent. Like almost everything in business, at the end of the day, it’s about the return on investment.

Business Plan Economic Analysis – Don’t Overlook It!

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Every small business operates in a number of different economies ranging from their neighborhood to worldwide. The health of these economies has a huge impact on the health of small businesses.

A business plan economic analysis should paint a picture of the economic environment your business will operate in. With many economic indicators, you can delve into further detail. Referencing information specific to small businesses in your state and industry helps to provide an even clearer context.

No, these indicators might not always paint a rosy picture. What they will do, however, is show that you’ve done your homework. That you, as an entrepreneur, understand your environment. You’ll show that you can plan around the threats you face and capitalize on the opportunities.

What to look for in a business plan economic analysis

  1. Small Business Employer Firms
  2. Proprietors’ Income
  3. Small Business Job Creation
  4. Business Births vs. Deaths
  5. Small Business Loan Supply and Demand
  6. Business Lending
  7. Small Business Loan Approval Rate
  8. Loan Charge-Off and Delinquency Rates

If you were so inclined, you could probably draw a correlation between any economic indicator and the health of your small business.

Depending on your industry, the particular economic indicators that affect your small business will vary. Whether you’re retail, manufacturing, goods, or services will make a difference.

Inspiration for these indicators was taken from the Small Business Economic Bulletin. This document is published by the U.S. Small Business Administration. Supposedly on a quarterly basis. Though, the Bulletin linked above is the most recent one I could find. It’s over six months old as of this writing.

Anyhow, I’ll work with what I’ve got. The Bulletin is a jumping-off point for the agencies that compile these statistics. I’ve covered some of these agencies before.

For each indicator addressed in the Bulletin, I’ll discuss what it measures, why (I think) it matters, and how to use the information. In the end, I’ll also touch on what (if anything) each indicator might mean for my startup.

These data are just a jumping-off point. You’ll have to dig into it further to determine what it means for your business.

Small Business Employer Firms

This indicator measures the number of small businesses that employ people.

business plan economic analysis small bulletin pg 1
Credit: advocacy.sba.gov

It is derived from data maintained by the BLS. Specifically, a database named Business Employment Dynamics (BDM).

Small business, for the purpose of this indicator, includes businesses with less than 500 employees. I think that includes a lot of businesses that would qualify as “mid-sized.” But, that’s just me.

An uptrend in the number of Small Business Employer Firms implies that the environment is ripe for small businesses to launch. A decline would imply the opposite.

Where possible, I always recommend digging down into regional or state information. Doing the same thing by industry is smart too. That way you get the most relevant economic statistics for your business.

In the BDM database, the best way I found to do this is by using the Multi-Screen option for data retrieval.

bdm multi screen
Credit: bls.gov/bdm/

You’ll notice two pairs of similar phrases if you browse the BDM. These phrases are Openings/Closings and Births/Deaths. So, what’s the distinction? I sent an email to the SBA and a tweet to the BLS.

The BLS responded quickly with a link to this page. The language is a little hard to understand. However, I think that the main difference is that Openings/Closings can include seasonal businesses. Births/Deaths are considered permanent.

The SBA, predictably, didn’t respond.

It’s my guess that this indicator is a tally of Births/Deaths. Which makes sense. Including seasonal businesses in the tally would increase its volatility. Probably better to count businesses that permanently open and close.

Proprietors’ Income

This is the aggregate amount of income earned by the owners of small businesses.

Specifically, sole proprietorships, partnerships, and tax-exempt co-ops. Dividends aren’t included in this indicator. Neither is rental income (i.e. by a landlord).

Most businesses start off as a sole proprietorship (Source). Businesses that don’t pay the proprietor enough income – die. A healthy small business environment should translate into healthy growth in Proprietors’ Income.

What if Proprietors’ Income is flat (or declining), but Employer Firms are growing? That might imply that more firms (proprietors) are fighting over shrinking pieces of the pie. If this is happening in your industry, beware.

The best way I found to drill down is to look at the most current release of Personal Income by State. From there, you want to go to the Interactive Tables. Specifically, you want tables SQINC4 and SQINC5 for quarterly information. SAINC4 and SAINC5 for annual information.

Clicking on either of those should guide you to what you need. Remember, you can use Ctrl to select multiple options!

proprietors income
Credit: apps.bea.gov

Small Business Job Creation

Job creation is a sign of growth. As customers demand more, help is needed to meet that demand.

It might come in the form of direct labor or administrative help.

Your small business may or may not follow suit. What this indicator tells us, though, is whether there is a net gain in small business jobs or not. If there is, that could be considered a tailwind. Not something that is going to guarantee success. But, not something you’re going to have to fight against either.

Here’s the flip side of that “good news” though. If small businesses (and the big boys) keep adding jobs, quarter after quarter, eventually you could reach a point where demand exceeds supply. The cost of labor goes up and (potentially) the quality goes down. For you, your suppliers, and maybe your customers.

Like Small Business Employment Firms, this indicator refers to the BDM database. Again, I suggest using the Multi-Screen Data Search to navigate it.

You can drill down by state if you choose to look at all industries and all sizes. However, some industry-specific searches can drill down by state too. I imagine it’s the bigger industries that allow for such a drill-down.

business plan economic analysis small job creation
Click to enlarge
Credit: data.bls.gov

Business Births vs. Deaths

This indicator ties in directly with the Small Business Employer Firms. More Births than Deaths mean that the number of Employer Firms goes up. More Deaths than Births – down.

Once again, we refer to the BDM database. Breaking information down this way allows you to see how much of pull Births and/or Deaths are having on the number of Small Business Employer Firms. For example, is the number increasing because of more Births? Or, because of fewer Deaths?

This is just further insight into the small business environment. It might be able to provide some clue as to how ripe it is for success.

When researching Establishment Births & Deaths you can isolate by industry. But, you’ll only get totals for the whole U.S. Conversely, when looking at all industries, you can narrow down by state.

Small Business Loan Supply and Demand

This indicator measures the percentage of bankers that answered two questions in the affirmative or negative. The first question asks if banks have tightened or eased their standards on small business lending. The second question asks if the demand for small business loans has increased.

business plan economic analysis small bulletin pg 2
Credit: advocacy.sba.gov

Now we shift gears a little. Away from small business employment, openings, closings, births, and deaths. The focus of the following four indicators is small business borrowing.

This indicator seems to be rather subjective. It comes from a quarterly publication by the Federal Reserve. This publication is called the Senior Loan Office Opinion Survey (SLOOS) on Bank Lending Practices.

Not a terribly objective measurement. More of “getting a feel for the room” statistic. It is just a survey, after all.

Beyond those two questions, though, there is a lot more in the SLOOS that measures bankers’ attitudes toward small business lending. Questions related to terms, collateral, covenants, and much more.

The lines on the chart seem to oscillate around 0. A negative would mean that the banker felt the opposite of what is being charted, I suppose. For example, a negative Banks Tightening figure means that more bankers answered that they were easing standards. A negative Reporting Stronger Demand line would mean that demand was weaker.

Anyhow, this indicator might provide insight into how many small businesses are seeking to employ financial leverage. Those insights can be compared with the indicators measuring expansion and contraction. If the small business environment seems ripe, but few are willing to leverage in this environment, then maybe the optimism about the future is shaky.

Don’t forget to check out the accompanying tables for a more quantifiable view of the data.

No industry or state-specific information seems to be available for this indicator.

Business Lending

This indicator compares small business loan volume to that of big business.

The Federal Deposit Insurance Corporation (FDIC) Quarterly Banking Profile is the source of this information.

Commercial and industrial loans to small businesses are measured. As are real estate loans under $1 million.

Like the Small Business Loan Supply and Demand indicator, I think this is indicative of small business owner optimism. If small business owners feel like the environment is good for investment, they are more likely to borrow. If they don’t feel like they can earn an adequate return for the risk, they will likely limit their exposure.

It’s wise to look at small business lending in several different ways. One indicator might tell you one thing. Another indicator – something else. When you get conflicting (credible) information you should investigate. You’ll hopefully come out the other end a shrewder businessperson.

fdic quarterly banking profile
Credit: fdic.gov
Click to enlarge

Small Business Loan Approval Rates

This indicator provides valuable information two-fold. First, it gives you an idea of what the odds are of getting approved for a small business loan. Second, it breaks the approval rates down by the type of financial institution.

Granted, you don’t know the quality of the applicants measured by this indicator. That is something that would help to put this information into perspective. Are they startups or existing businesses? Maybe they aren’t adapting appropriately to changes in cash flow.

Big banks, small banks, credit unions, and alternative sources are measured. This might provide some insight as to where to go if your small business needs financing.

Unlike the other indicators, this one is more of a snapshot. Historical information is displayed. But only for the same month three and six years ago. It is not presented as a time series.

This gives you an idea of how well to prepare and where to focus your efforts when you need financing. If lenders are becoming more discerning, then you know that you’ll need to create a better business plan.

What you see in the Bulletin is pretty much all there is in the report itself. No state, industry, or size breakdown is provided.

Loan Charge-Off and Delinquency Rates

This indicator gives you an idea of how effectively other businesses are employing their leverage.

Access the tables behind this indicator here.

Granted, it really only points out what percentage of businesses are doing poorly. It doesn’t say much about the upside. Only the downside.

The description of the report doesn’t outline exactly how the terms are defined.

My interpretation is that Delinquency means that one or more payments are late. Maybe even only by one day.

Charge-Off likely means that the bank has written off the loan against their reserves. They feel that payment for the remaining balance is extremely unlikely.

This serves as a lagging indicator for some of the others. I think the indicator it ties to best is Business Lending. If Business Lending is increasing, but Delinquency is level, we can assume that businesses are finding a good use for the borrowed money.

No state, size, or industry-specific information is available.

delinquency rates
Credit: federalreserve.gov

Business plan economic analysis for my startup

I don’t know if I’ll finance my startup with debt or equity. Therefore, I don’t know if the lending indicators are relevant to my business plan. If I plan on using debt financing, I can circle back and scrutinize the relevant indicators.

Right now, I don’t plan on hiring any employees. So the Small Business Job Creation indicator isn’t currently relevant either.

Of the remaining three indicators, two are somewhat redundant – Small Business Employer Firms and Business Births vs. Deaths.

I feel like the Business Births vs. Deaths indicator gives a little more insight. Let’s look at what it shows for my industry – Wholesale trade.

wholesale trade births vs deaths
Credit: data.bls.gov

Not terribly encouraging. In 2014, Births fell below Deaths and seemed to stay there. This suggests, possibly, consolidation in the industry. Big, strong firms forcing out smaller, weaker ones.

What about Proprietors’ Income?

More encouraging. Proprietors’ Income has risen sharply in my state since Q1 of 2016. Despite the title, the table doesn’t have a NAICS breakdown. But it doesn’t.

So, I don’t know the whole story. If this rise took place in my industry, I could assume that there’s plenty of money to be made. It’s just going to fewer hands. This means that I had better have a sound plan for success.

proprietors income kansas
Click to enlarge Credit: apps.bea.gov

What other indicators should I have included in my business plan economic analysis?

Which indicators are important for your business plan economic analysis?

Join the conversation on Twitter!

Market Size for a Business Plan – 2 Methods to Gauge It

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market size for a business plan featured

In order to estimate how much in sales your startup can hope for, you’re going to have to estimate the market size for your product/service(s). This is critical for your startup because it will give you an idea of your business’ potential. It will also help you plan for capacity-related issues.

2 approaches to estimating the market size for a business plan

I cover this topic more in-depth in a post on market size and growth rate on my sister site, InvestSomeMoney.com.

The context there is focused on investing your money in a publicly-traded company. Though that’s a little different than what we are doing here, the fundamental principles remain the same.

The goal is to determine how many potential customers there are for a business and how much they are willing to spend. In order to do that, we can employ two general methods. These methods are a top-down analysis and a bottom-up approach to understand market size and growth.

One way to think about this is that a bottom-up approach uses multiplication and a top-down analysis uses division to arrive at an estimated market size.

After writing on this subject several times, I’ve come up with another way to think about these methods. I think a bottom-up approach should look internally, at things like unit size and capacity. A top-down analysis should look externally at things like demographics and market research.

Looking at this from these two different perspectives opens the door for further analysis. When you’re done, you should know whether you can expect to be capacity constrained or demand constrained. You’ll also start to flesh out some ideas that will help you further into your business plan.

If you do an analysis with both approaches, you can compare the results. For instance, if your bottom-up approach is higher, you’ll know that you could have excess capacity issues. You need to consider scaling that back or otherwise expanding your product/service offering to drum up additional demand.

Conversely, if your top-down analysis reveals that demand is in excess of capacity, then you are leaving money on the table. Time to start thinking about what you can do to scale up and capture as much of the market as possible.

Let’s start by taking a look at a bottom-up approach to estimating the market size for a business plan.

Bottom-up approach example

On my sister site, InvestSomeMoney.com, I researched three real-life examples of a bottom up market sizing approach. In those examples, you’ll see that they sometimes mix in a little top-down analysis with their bottom-up approach and vice versa. There’s no rule against doing that, but I would rather look at things from two totally different perspectives.

When using a bottom-up approach, try to start with the most simplistic piece of firm information you can get your hands on. Then, start to build on it with other information, or the best guess you can muster.

You can think of a bottom-up approach as one that focuses on how much and how often customers will buy.

This information might be something you have internally. Or, it might be from the information you found by researching online. Start with a single “serving size” of your product/service. Then, think about how often a customer would buy. Work your way up from there.

A bottom-up approach for my business plan

As mentioned in earlier posts about business plans – I’m building one as I write these. My theoretical product is an all-natural topical hair loss treatment.

In the post linked above, I performed something of a top-down analysis of market size for a business plan. I later discovered that I was operating with incomplete information.

There’s still a lot to consider regarding packaging volume and dosage. That will require more thought. But, for the time being, I’m going to estimate the volume of a one month’s supply and the daily dosage to be the same as Rogaine. If that changes as I progress with my business plan, I can easily circle back to this and plug in different numbers.

With Rogaine as my benchmark, I know that a dosage of my product would be 1 mL. The product would be used twice a day. My product would come in 2 oz (60 ml) bottles. Each bottle would be one month’s supply, as I said.

Thinking about capacity

Okay. Now that I have a grasp on the package size – what about blending and packaging? If this idea were to come to fruition, I don’t picture myself blending batches in my bathtub and filling bottles with a ladle and a funnel. I would need access to some sort of industrial equipment.

Fortunately, a quick internet search shows that there is no shortage of contract blenders and packagers out there. Especially for food and supplements. What it costs, remains to be seen. That’s an issue for another time. For now, I just want to get an idea of how much I could manufacture.

This company claims it can blend 1.25 million pounds per workday. We’ll assume, for now, this represents the average contract blender/packager. What does that translate into in terms of 2 oz bottles?

First of all, I wouldn’t need all 26 of their kettles. Only one, tops, especially at startup. So, if we divide the 1.25 million pounds by 26, we get a per kettle capacity of about 48,000 lbs per day.

Pounds are a weight unit of measure (UOM) and ounces are a volume UOM. To make the conversion, we’re going to have to do some more estimating.

Water weighs a little over 8 lbs/gallon. We’ll assume my product has roughly the same density.

8 lbs ÷ 128 oz (per gallon) = .0625 lbs/oz. With each bottle containing 2 oz, we know that it’ll weigh approximately .125 lbs/bottle.

This means that with one of this company’s kettles, I could blend 384,615 bottles worth of product per day. 96.5 million bottles per year. At an approximate sales price of $7.50 per bottle, that translates into nearly $725 million in revenue per year.

Okay, I’ve looked at things from a bottom-up, capacity-focused approach. Let’s now consider a top-down, demographic-focused analysis.

Market Size for a Business Plan capacity

Top-down analysis

Not surprisingly, I also wrote a post on InvestSomeMoney.com with examples of a top-down analysis to determine market size for a business plan. When you read through it, you might notice that some of the examples use Census data (or something similar). They take big chunks of information and start narrowing down their market from there.

Which brings us to three important terms for performing a top-down analysis. These are:

Total addressable market (TAM)
Serviceable available market (SAM)
and
Serviceable obtainable market (SOM)

A SOM is a fraction of the SAM. In turn, a SAM is part of the TAM.

The TAM can be thought of as every potential customer that you can reach geographically. The SAM is what’s left when you niche down a little into the population that is a good fit for your unique selling proposition. Finally, the SOM represents the percentage of the SAM you can realistically expect to take.

It’s unlikely that you will ever capture 100% of the SAM. Even in a specific niche, you can’t be everything to everyone. That’s alright, though. The goal of this exercise is to make realistic estimates so that you have a sound business plan to work from.

When doing a top-down analysis, start with a large population or an overall industry size. From there, narrow down your customer until you arrive at your SOM. It helps to have a “customer avatar” in mind before starting a top-down analysis so you know where to niche down to.

I would suggest you perform a business plan demand analysis first to get a crystal clear picture of what that avatar is. You might think you know it intuitively. But you might be surprised at what you find – like I was!

A top-down analysis for my business plan

I know that not every person in the U.S. (much less the world) is going to want or need an all-natural topical supplement for hair loss. Who might though???

I’ll refer back to my handy-dandy business plan demand analysis (linked above) to see what I can find.

Here, I’m reminded of the ages that men and women first started experiencing hair loss. I’m reminded of the percentage that has sought any sort of treatment. Finally, I’m given an idea of what types of treatment they have tried.

A quick visit to Data.Census.Gov and I find table S0101, which gives me the U.S. population by age and sex. I customize and filter the table real quick. Then, I copy and paste the data I need into my spreadsheet.

Market Size for a Business Plan data census gov

Next step is to narrow these numbers down. I’ll use the “regular” numbers and the pessimistic numbers from sensitivity analysis from my business plan demand workbook.

I want to know the percentage of men who have had hair loss and tried any sort of treatment. Then, I want to go deeper and estimate the number that has found supplements to be effective. I’ll do this for both the most-likely and the worst-case scenarios. On the women’s side, I’ll do, more or less, the same thing.

TAM and SAM

You’ll see that I didn’t use the same age ranges for men and women. I assumed that males would start experiencing hair loss earlier, but would also stop caring about it earlier too.

The age range for males in my TAM was 20 – 54. For females, it was 25 – 59. This translates into a TAM of 151 million people in the U.S.

For the SAM, my worst-case scenario estimated that .9% of the male population in the target age ranges would be part of my market. 1.54% of females in the target age ranges were also assumed to be part of my market. This translated into a worst-case SAM of 1.8 million people.

As for my most-likely SAM, I estimated that 1.41% of males and 2.4% of females in the target age ranges were potential customers. This resulted in a SAM of 2.88 million people. Over a million more potential customers.

SOM

SOM is tricky.

Who’s to say what percentage of the SAM my company could capture? Obviously, it would start at 0% and work its way up from there. Where would it stop though?

It will depend, in part, on the number of companies vying for this niche. As I often do, I will refer to the Pareto principle. The Pareto principle states that 20% of the inputs will be responsible for 80% of the outputs. Put another way, 20% of the companies will have roughly 80% of the market share.

I’ll refer back, again, to my post on business plan demand. In it, I found three direct substitutions for my topical hair loss product. I won’t include Minoxidil (Rogaine) in that group, because of its unnatural chemistry.

Again, without getting too mired in math, I estimate that there are approximately thirty companies in the topical hair loss supplement space. This was a quick and dirty estimate based on the results of an internet search.

Six of those thirty companies probably control 80% of the market. That leaves 4.2% (1 ÷ 24) of the remaining 20% as my short-term SOM. Obviously, if my product were to take off, that amount could grow considerably and could approach the SAM.

What that means as far as the market size is 15K people worst-case and 24K people most-likely. At 12 bottles purchased per year, this translates into 184K and 287.5K bottles per year respectively.

Here’s a look at the spreadsheet breaking that all down:

Market Size for a Business Plan top down
Click to enlarge

Comparing a bottom-up and top-down analysis when determining market size for a business plan

Obviously, a couple hundred thousand bottles (top-down) is a far cry from 96.5 million (bottom-up). So, it would appear I will not be capacity constrained in the near future. In fact, as this startup moves forward, I need to make sure I’m not over-buying capacity. Those huge fixed costs could kill my business before it has a chance to get off the ground.

Speaking of fixed costs, the information from this analysis has given me good data to build my pro forma financials – when that time comes.

Now, at some point in the future, selling my product internationally could be an option. However, in this tiny niche, it is unlikely that I’ll ever need that much capacity for this one product.

Market size for a business plan

What were there factors I didn’t consider (but should have) when estimating my potential market size?

How might you have approached this differently?

Join the conversation on Twitter!

“Where Can I Get Data for Market Research?” 6 Gov’t Sources

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market research data sources featured

You know that market research is important. It helps you to better understand your customers and your environment. Are the market research data sources you’re using painting a complete picture?

Do you have unanswered questions? Or, perhaps, you’re missing things that you didn’t even know would affect your small business.

Complete the picture of your market research by checking out the valuable information available for free from these government resources.

1. Statistical Abstract of the United States – A summary of…everything

Link

The Statistical Abstract of the United States was a yearly document published by the Census Bureau. This tool for market research was a summary of the most important statistical information collected by the government. A really great reference that died in 2012.

stat abstract of us
Credit: census.gov

The entire document, itself, is a beast, at over 900 pages. Alternatively, if you want market research piecemeal, you can browse information by topic and download relevant spreadsheets. 2011 is when the spreadsheets were last updated. To get more timely information, you’ll probably have to reference what agency the data was compiled from.

The Statistical Abstract of the United States is a neat concept. But, as of the time of this writing (2019), the information is pretty dated. Like the USA.gov website, it can serve as a starting point to ultimately find the market research data you need. Like an old-fashioned card catalog.

2. American FactFinder – the (former) granddaddy of all demographic information

This tool is part of the Census website. It has an enormous amount of demographic, economic, and geographic statistics. If you could use only one source of information in your market research, this might very well be it.

In July of 2019, the Census Bureau transitioned to Data.Census.Gov as its main portal for public access to information. The American FactFinder (for now) can still be relied upon to provide valuable, timely info for market research.

Because of the breadth of information available, it’s unlikely that there isn’t something here that could help you with your market research project. A better understanding of your customers and your business environment will help you make better decisions. Not to mention, avoid potentially disastrous mistakes.

The American FactFinder tool is basically a guide to the relevant Census tables that have the market research you need. You pick topics that are of interest to you. The American FactFinder will return the tables that contain pertinent information. From there, you can view or download the information.

There are three primary ways to find what you need.

First is the Community Facts. Here, you can find some high-level information along with some links to tables related to various topics

The Guided search walks you through a series of questions and then presents you with tables that match the criteria you set forth.

Finally, my favorite method to use is the Advanced search. Here, you select your Topics individually. The relevant tables are presented as search results.

market research data sources american factfinder table
Click to enlarge Credit: factfinder.census.gov

No matter what method you choose, all paths lead to the Table viewer. It’s here that you can add and remove information and format it as you see fit. It’s also here that you can download into a spreadsheet for further analysis, if you wish.

3. Federal Reserve Consumer Credit Data – American consumer and student debt

Link

For better or worse, Americans like to borrow money to purchase things. Things that don’t (typically) give them much of a return on investment. The Consumer Credit Data (G.19) report has statistics on the amount of credit extended to the public – real estate excluded.

This report is relatively small. Especially when compared to other government market research sources. Yes, I know the Fed isn’t technically part of the government.

market research data sources federal reserve g19
Click to enlarge
Credit: federalreserve.gov

Here is a link that describes how to read this report.

First of all, information is broken up into sections that are Seasonally adjusted and Not seasonally adjusted.

The information about who holds the debt (Depository institutions, Finance companies, etc.) probably won’t interest you much. The levels and flows of revolving (credit card), nonrevolving (student and car loans) might interest you, as a business owner.

It’s a highly technical report. Probably not something you would reference unless you had a business that was sensitive to consumer debt levels.

So, for instance, if you have a business that was very un-recession proof, then this is something you might keep an eye on. Because once debt (fixed costs) start to balloon to unsustainable levels, it could be your businesses such as yours that suffer first.

In cases such as that, you might cross-reference another source of market research. One that would give you corresponding information on disposable income.

4. Consumer Product Safety – Avoid potential liability

Link

The Consumer Product Safety Commission publishes information aimed at decreasing injuries and death from consumer products. They also have the authority to implement standards regarding public safety.

For small business owners, this information is useful because it lets you know potential sources of liability. Whether it be products you sell or equipment you use in the normal course of business.

From a market research standpoint, this information might be useful if you were designing a brand new product. It might help you avoid some of the safety pitfalls of existing products.

market research data sources cpsc
Credit: cpsc.gov

Information is broken into nine categories. Each category has a list of dated reports and injury statistics on related products. It’s also broken out by hazard category. For example – electrocutions, fire, poisonings, etc.

Additionally, the CPSC has a section of their website dedicated issues facing small businesses. Here’s a link to that. I think a quick browse through that page is a good idea for any small business owner.

Of particular interest, for a business designing a brand new product, is the Regulatory Robot. This is a wizard that asks you questions about your new product. It then delivers customized regulatory information that you need to know. A real time-saver for market research and risk management.

5. BLS – market research and help with forecasting/budgeting

Link

As the name implies, the Bureau of Labor Statistics measures labor activity. In addition, it also collects and interprets information on working conditions and price changes.

The Bureau of Labor Statistics prides itself on its objective reporting of the facts. Transparency and accurate data are among its core values.

An entrepreneur could use BLS statistics to forecast revenue. In particular, it would be useful in creating best-case and worst-case scenarios. By knowing how prices changed in different economic conditions – a more informed forecast can be created.

Furthermore, data can be found on wages that would help a startup better estimate labor costs when drafting a business plan.

Beyond that, there is a lot of economic data. Much of this is geographically specific. Which will accentuate information pulled from elsewhere.

market research data sources bureau labor statistics
Credit: bls.gov/data

Data from the BLS usually comes in a handy tabular format. Finding what you need isn’t as intuitive as other sites. But, it’s not too complicated. You’ll see that it’s grouped into categories (Inflation & Prices, Employment, Pay & Benefits, etc…) and sub-categories.

For each sub-category, there are several options. These are Top Picks, Data Finder, One Screen, Multi-Screen, Tables, and Text Files. Each is a different means to the same end – the tables that have the statistics you want.

I prefer the Top Picks and One Screen options for finding what I need.

6. Bureau of Economic Analysis – a look at the bigger picture

Link

The Bureau of Economic Analysis focuses on the U.S. economy. This government agency is responsible for calculating the GDP among many other important economic indicators.

As goes the economy so goes business. Some businesses are recession-proof. But, most are not. If you’re a small business planning for the coming year, or an entrepreneur needing market research for a business plan, you’ll want to familiarize yourself with the economic cycle.

You’ll not likely be able to predict when the economy will expand and contract. However, when you compare BEA statistics with those from other sources, you can get an idea of cause and effect. This will give you a better picture of the business environment. In turn, you’ll better understand what it would mean for your small business if ___ happened.

There are three general methods for accessing the Bureau of Economic Analysis’ data. These methods are the Data menu, the Tools menu, and the Interactive Data Application (accessed from the Tools menu).

market research data sources bureau economic analysis
Credit: apps.bea.gov

Of these three methods, I prefer the Interactive Data Application.

From the main menu of the App, you can browse National Data, Industry Data, International Data, or Regional Data. Each choice will lead you to a sub-menu and some will give you the option to map your information.

From the sub-menu, narrow down what you want to see further. Many of the tables will allow you to specify what state/region you want data for and the year of the results.

Market research data sources

Are there any other market research data sources that fly under-the-radar? What are they?

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Census Data Market Research at the New Data.Census.Gov

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census data market research featured

In an effort to modernize, the Census Bureau recently launched its new portal for census data market research. It is located at Data.Census.Gov. Here, you can find information on a bevy of subjects including population, economics, education, business, and many other topics.

Market research is important to know who your customers are and where they are at. No other free resource (that I know of) has the breadth of information that the Census does. It is your ticket, as a small business owner, to better understanding your customers and your environment.

What is Data.Census.Gov?

This tool is part of the Census website. It has an enormous amount of demographic, economic, and geographic data. If you could use only one source of information in your market research, this might very well be it.

The main portal for accessing Census data used to be the American FactFinder. In July of 2019, the Census began using Data.Census.Gov as its primary means of providing Census data.

The user experience is much more polished on Data.Census.Gov than it was on the American FactFinder. It seems to have been built with the general public more in mind the data-centric business users.

Why use Data.Census.Gov?

It’s unlikely there isn’t something here that could help you. A better understanding of your environment will help you make better decisions. Also, avoid potentially disastrous mistakes.

Most people think of the Census of only having data on population and demographics. In fact, the Census has a lot more. You can find data on health, housing, business/trade, employment, and more.

So, whether your business is retail, manufacturing, B2C, or B2B, you’re likely to find insights here that you would not have otherwise known.

How to access census data market research?

With the American FactFinder, there were four ways to conduct a search: Community Facts, Guided Search, Advanced Search, and the Download Center.

At Census.Data.Gov you are presented with two options. A search bar at the top, and “canned “searches at the bottom.

Start your search with whatever’s most important to you. If it’s a geographic area, start with that. If it’s related to employment, population, or some other topic, start with that.

At any time, if you want to start over, click on the United States Census Bureau button in the upper left. That will take you back to the home page to start a new search.

A solely geographic search

A geographic search will bring up a screen full of “quick facts” about that area. To access this information you need to select the geographic area you want from the drop-down menu that appears as you enter your query. Don’t just type it and click Enter.

The “quick facts” include things like People and Population, Race and Ethnicity, Families and Living Arrangements, among other topics. Basically, the same topics outlined in the “canned” searches at the bottom of the home page.

A topic-based search

A search that includes a topic such as health insurance or housing will give you a results page that includes TABLES, MAPS, and PAGES related to your query. By clicking on the corresponding result-type along the top of the page, you’ll be taken to results that are exclusively that type.

Tables

census data market research tables
Credit: data.census.gov

TABLES are the bread and butter of the data-centric user. Upon clicking on the TABLES option, you’ll see a list of tables in the left-hand menu that corresponds with your query.

Once you find the table you’re interested in delving into, click the Customize Table button. It’s in the upper-right.

Now, you can expand and collapse rows so you can only see the data you’re interested in.

When you’re ready to get this information into a spreadsheet, click the chevron (two arrows pointing up) by the title of the table. Select Download/Print/Share. Next, you’ll select the years you want information for and click Download when you’re ready.

Unfortunately, the downloaded data sucks. As I also outlined in the Defining a Target Market… post. It’s difficult to read and can’t easily be put into a format that facilitates understanding. It can’t be copied and pasted into a spreadsheet easily. The American FactFinder site did allow for easy copying and pasting..

Also, if you’d like to add or remove other geographic areas, or the year of the data, click CHANGE GEOGRAPHY or CHANGE YEAR respectively.

Also using the Filter with the tables will allow you to use similar functionality as the Advanced Search option. The Advanced Search will be covered later.

Once you’re satisfied, you can click TABLES in the upper left corner to return to the main tables page.

Maps

census data market research map
Credit: data.census.gov

The map and table are tied together. The changes you make in one will bleed over into the other. For instance, if you choose a different Geography in the map, your table will change accordingly.

Along the top, you can also change the Data Variable. These options correspond with the rows in your table.

Geographies will change color according to the data variable. In the lower-left, you’ll see a legend that shows the amounts and quantity of Geographies in each quintile.

You also have the option to click on surrounding Geographies (states, counties, etc.). When you do, they’ll be added to your analysis.

Filters

In the tables, maps, and the Advanced Search, you can narrow down the results by adding Filters. The Filters are pretty intuitive. Select those that you want to use and the data will be updated accordingly. If a Filter isn’t available, it will be greyed out.

Census data market research

What other tips and tricks do you have for finding the data your business needs with Data.Census.Gov?

Do you know of a better way to get information from the tables into spreadsheets?

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