How to present your pricing strategy in your business plan?

Clearly communicating your pricing strategy in your business plan is a delicate task which requires method. Our guide will tell you everything you need to know!

Ready? Let’s get started.  

What are the objectives of the pricing strategy subsection of your business plan?

The pricing strategy section is an essential part of any business plan, the primary objective of this section is to provide investors, lenders, or strategic partners:

• A clear understanding of how you plan to price your goods and services and why.
• Reassurance that your prices are going to be competitive because you have a clear understanding of the market environment your business is involved in (either through experience or extensive research).
• Reassurance that you can achieve your target revenue by implementing the pricing strategies you’ve mentioned in the document. 

Now that we understand the objectives, let's have a look at the content of the section itself. 

What information should I include in the pricing strategy section of my business plan?

In terms of context, the pricing strategy subsection is a part of the overall strategy section of your business plan. This section follows both the products and services and market analysis sections.

So at this point, the reader is already familiar with your offerings and target market, but not yet with your sales and marketing plan.

Explaining your pricing strategy and how it aligns with your positioning

The first thing you need to do is explain how you will price your main categories of products or services, and why.

You can give examples of a couple prices for the main products or services you offer, but don't confuse this section with a price catalogue. Try to avoid listing individual prices in the pricing strategy section. 

Also note that your pricing strategy will need to be coherent with your market positioning. For example, if you want to be perceived as a premium service, your prices will need to be higher than competing services in order to reflect this.

There are several methods you can use to set your prices. Below are a couple examples of pricing strategies you could use based on your industry. 

Examples of pricing strategies for selected industries

Cost-plus pricing for a retailer

A cost-plus pricing strategy is one of the most commonly used pricing strategies. If you are looking to open a retail business, cost-plus pricing may be a suitable strategy for you. 

Cost-plus pricing involves adding a markup to the cost of goods. For example, items will be sold at double their purchase price.

A cost-plus pricing strategy is a blunt instrument, the focus is on ensuring that products are sold with a sustainable profit margin, but in doing so the strategy might sacrifice competitiveness and your prices might end-up being higher than competitors.

Value-based pricing for a business consultant 

Another popular pricing strategy is value-based pricing. If you have a consultancy business, value-based pricing could be the best option for you.

Value-based pricing consists in setting a price at a fraction of the value delivered to the customer in order to capture a fair share of value while guaranteeing a return on investment for the client. For example, we charge £100k for our services and clients who hire us save on average £1m in costs which gives them a return on investment of 10x.

As you can see, this strategy is a bit more evolved as the focus is on the value of the outcome delivered. Choosing value-based pricing requires a deep understanding of your target market, their needs, preferences, and willingness to pay.

This strategy works well when your products or services are highly differentiated from what your competition offers, making direct price comparisons difficult or irrelevant.

Market-driven pricing for a hairdresser

Market-driven pricing is also commonly known as competitive pricing. It's a strategy which works well in hyper-competitive environments where little differences exist between the products or services offered on the market.

Competitive pricing involves setting your prices while considering the prices competitors are offering for the same service. 

For example, a hairdresser could choose to set their prices slightly lower or higher than other hairdressers in town, depending on their positioning.

Pricing objectives 

Whether your pricing objective is to ensure a specific profit margin or to gain market share, you need to clearly state that in the pricing strategy. 

If your pricing objective is to hit a specific profit margin, you should also mention the actual margin and state why you’ve chosen it.

If your pricing objective is to gain market share, you’ll probably have an initial market penetration price to help enter the market and gain market share. Once those numbers are achieved, you can then increase prices to focus on profitability. 

Discounts

If you are planning to provide discounts, promotions, bundles, or special offers to consumers, those details must also be mentioned in the pricing strategy. You should mention how these discounts and special offers fit into your overall pricing strategy. 

The purpose that offering discounts serve must be mentioned clearly in the pricing strategy. You may give discounts to attract new customers, encourage repeat business, or “clear out” obsolete/old products.

Sales cycle

It can also be helpful to explain your sales cycle in your pricing strategy. Especially if you have a long or complex cycle with multiple instalments. This will help the reader of your business plan understand when you will receive the cash flow associated with your prices and when you will recognize revenues in your P&am;L.

Distribution channels

If you use different distribution channels, you might want to address how your products or services will be priced in each channel.

For example, a manufacturer could apply a cost-plus pricing based on the volume of unit for wholesalers, and competitive pricing in their own stores.

Unit economics 

It is also helpful to communicate on unit economics, if applicable to your business.

This is true in particular:

1. If you are in the manufacturing business, you will need to explain in detail how the cost per unit and associated margins evolve with the number of units produced and/or sold. 
2. If you are operating in an industry with a high price elasticity (customer being very sensitive to price). 

Variations

Last but not least, you also need to mention how often you intend on reviewing your pricing strategy.

The frequency will largely depend on your industry. For example, as a hotel owner, you may need to review the room prices daily, but as a consultant your prices could be reviewed annually.  

What tool should I use to write my business plan?

Using online business planning software is the most efficient and modern way to create a business plan.

There are several advantages to using specialized software:

• You can easily create your financial forecast by letting the software take care of the financial calculations for you without errors
• You are guided through the writing process by detailed instructions and examples for each part of the plan
• You can access a library of dozens of complete business plan samples and templates for inspiration
• You get a professional business plan, formatted and ready to be sent to your bank or investors
• You can easily track your actual financial performance against your financial forecast
• You can create scenarios to stress test your forecast's main assumptions
• You can easily update your forecast as time goes by to maintain visibility on future cash flows
• You have a friendly support team on standby to assist you when you are stuck

If you're interested in using this type of solution, you can try The Business Plan Shop for free by signing up here.

How long should the pricing strategy section of your business plan be?

Although there is no set length for your pricing strategy section, it could extend to a couple of pages after all the above-mentioned information is added to it. 

The length of the pricing strategy subsection of your business plan depends upon different factors that include:

• The number of products and services your business is offering.
• The number of customer segments or distribution channels.

However, it's important to understand that the length of the pricing strategy section may vary depending on the market's competitiveness. In a highly competitive market, this section will generally be shorter, as prices tend to be standardized.

In contrast, in a more open market, such as consultancy, the length and complexity of your pricing strategy will depend on factors like the specific services you offer and your expertise, rather than solely on market conditions.

Your pricing strategy must be well-organized and presentable. So, be sure to include headings to make it easier for the readers to find the information they are looking for. You can include additional documents, such as historical information or supporting documents, in an appendix to your business plan.

Example of pricing strategy in a business plan

Below is an example of how the pricing strategy subsection of your business plan might look like. As you can see, it precedes the marketing plan subsection and is part of the overall strategy section of your business plan.

This example was taken from one of our business plan templates.

Also on The Business Plan Shop

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• Milestones in business plan
• How to write the products and services section of your business plan
• Example and tips to present your management team in a business plan
• How to write the suppliers section of your business plan?

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