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Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place. Price is the only revenue generating element amongst the four Ps, the rest being cost centers. Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. Thus pricing is very important in marketing.

What a price should do

A well chosen price should do three things: achieve the financial goals of the company (e.g., profitability) fit the realities of the marketplace (Will customers buy at that price?) support a product's positioning and be consistent with the other variables in the marketing mix price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns a low cost price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributors From the marketer's point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer. A good pricing strategy would be the one which could balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price beyond which the organization experiences a no demand situation).

Pricing methods
As we said earlier, there is no "one right way" to calculate your pricing. Once you've considered the various factors involved and determined your objectives for your pricing strategy, now you need some way to crunch the actual numbers. Here are four ways to calculate prices:

Cost-plus pricing - Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20% markup, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. So long as you have your costs calculated correctly

and have accurately predicted your sales volume, you will always be operating at a profit.

Target return pricing - Set your price to achieve a target return-on-investment (ROI). For example, let's use the same situation as above, and assume that you have $10,000 invested in the company. Your expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit. Value-based pricing - Price your product based on the value it creates for the customer. This is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is "pay for performance" pricing for services, in which you charge on a variable scale according to the results you achieve. Let's say that your widget above saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems like a bargain maybe even too cheap. If your product reliably produced that kind of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months. However, there is one more major factor that must be considered. Psychological pricing - Ultimately, you must take into consideration the consumer's perception of your price, figuring things like:

Positioning - If you want to be the "low-cost leader", you must be priced lower than your competition. If you want to signal high quality, you should probably be priced higher than most of your competition. Popular price points - There are certain "price points" (specific prices) at which people become much more willing to buy a certain type of product. For example, "under $100" is a popular price point. "Enough under $20 to be under $20 with sales tax" is another popular price point, because it's "one bill" that people commonly carry. Meals under $5 are still a popular price point, as are entree or snack items under $1 (notice how many fast-food places have a $0.99 "value menu"). Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.

Fair pricing - Sometimes it simply doesn't matter what the value of the product is, even if you don't have any direct competition. There is simply a limit to what consumers perceive as "fair". If it's obvious that your product only cost $20 to manufacture, even if it delivered $10,000 in value, you'd have a hard time charging two or three thousand dollars for it -people would just feel like they were being gouged. A little market testing will help you determine the maximum price consumers will perceive as fair. Now, how do you combine all of these calculations to come up with a price? Here are some basic guidelines: Your price must be enough higher than costs to cover reasonable variations in sales volume. If your sales forecast is inaccurate, how far off can you be and still be profitable? Ideally, you want to be able to be off by a factor of two or more (your sales are half of your forecast) and still be profitable.

You have to make a living. Have you figured salary for yourself in your costs? If not, your profit has to be enough for you to live on and still have money to reinvest in the company. Your price should almost never be lower than your costs or higher than what most consumers consider "fair". This may seem obvious, but many entrepreneurs seem to miss this simple concept, either by miscalculating costs or by inadequate market research to determine fair pricing. Simply put, if people won't readily pay enough more than your cost to make you a fair profit, you need to reconsider your business model entirely. How can you cut your costs substantially? Or change your product positioning to justify higher pricing?

Pricing is a tricky business. You're certainly entitled to make a fair profit on your product, and even a substantial one if you create value for your customers. But remember, something is ultimately worth only what someone is willing to pay for it.

Pricing strategies for small business

The pricing strategy of your small business can ultimately determine your fate. Small business owners can ensure profitability and longevity by paying close attention to their pricing strategy. Commonly, in business plans I've reviewed, the pricing strategy has been to be the lowest price provider in the market. This approach comes from taking a quick view of competitors and assuming you can win business by having the lowest price. Lowest Pricing Does Not Win Having the lowest price is not a strong position for small business. Larger competitors with deep pockets and the ability to have lower operating costs will destroy any small business trying to compete on price alone. Avoiding the low price strategy starts with looking at the demand in the market by examining three factors: 1. Competitive Analysis: Don't just look at your competitor's pricing. Look at the whole package they offer. Are they serving price-conscious consumers or the affluent group? What are the valueadded services if any? 2. Ceiling Price: The ceiling price is the highest price the market will bear. Survey experts and customers to determine pricing limits. The highest price in the market may not be the ceiling price. 3. Price Elasticity: If the demand for your product or service is less elastic, you can then have a higher ceiling on prices. Low elastic demand depends on limited competitors, buyer's perception of quality, and consumers not habituated to looking for the lowest price in your industry.

Once you understand the demand structure in your industry, review your costs and profit goals as set in your business plan or financials. The low price strategy is best avoided by small business but there are conditions such as a price war that can drag a company into the lowest price battle. Avoiding a Price War A price war can wreck havoc in any industry and leave many businesses, out of business. In the early 90's, I observed the competitive exercise equipment market enter a price war in a large city market. Profits were plentiful but a price war took the gross margins from 42% to 12%. In less than 18 months, over 60% of the retailers were out of business while my division went national. Take these tips to evade a deadly price war:

Enhance Exclusivity: Products or services that are exclusive to your business provide protection from falling prices. Drop High Maintenance Goods: There may be products or services in your business that have high customer service and maintenance costs. Drop the unprofitable lines and find out what customers don't want. Value-added: Find value your business can add to stand out in the marketplace. Be the most unique business in the category. Branding: Develop your brand name in the market. Brand name businesses can always stand strong in a price war. Leave the price-cutting and price wars to big business. Small businesses with solid pricing strategies can escape a price war and low price position. Carefully, consider your price decisions. Your business depends on it.

How Small Firms Can Compete with Big Companies Through Better Pricing
August 14, 2012
Ed Farquhar looks at how smaller companies can beat bigger competitors by taking a fresh look at their sales and pricing strategies. More companies are looking for opportunities to grow their business by moving into new sectors. Large companies in particular are confronting and shaking up established markets in their bid to carve out more sales in an ever-shrinking economy. This can have implications for small and medium-sized enterprises that are already in these markets. Take Amazon Supply, for example, a new distribution service offering industrial and research supplies as well as equipment and materials to business. Since its launch in April 2012, there have been concerns amongst mid-market distributors that smaller businesses simply won't be able to compete with a company offering the low prices and sheer scale that Amazon so easily provides. However, as SME leaders and entrepreneurs know, size doesn't always matter. started off as a small company with a radically different approach to selling software. It is now one of

IT's major players in the cloud computing market. Well-established smaller companies with a strong understanding of their markets know that employing clever strategies and tools will help them compete with larger players and continue to grow. When big companies offering low prices enter the arena, a key strategy for smaller companies must be to pay greater attention to their pricing as an essential lever for profitability. Many businesses believe that pricing is something they already manage effectively. However, research has shown that mid-market managers are not giving this essential element of the sales strategy the level of attention it truly deserves. In so doing, they are leaving valuable profit on the table and opening themselves up to exactly the kinds of competition they wish to avoid. The University of South Florida completed a study this year revealing that smaller businesses have the most to gain by focusing in on their pricing strategy. The study indicated that the majority of companies did not have a dedicated pricing team, did not formally manage pricing and applied a piecemeal approach to dealing with their sales strategy. The evidence points to smaller businesses needing to take a more scientific approach to their sales to ensure that valuable margins are not overlooked. How do they do this? The introduction of large newcomers, such as Amazon Supply, might cause SMEs to try to compete using low prices. This can result in them reducing margins, lowering cost coverage and focusing on market-based strategies. However, this approach fails to deliver a deal based on hard facts about what the customer is willing to pay and under what circumstances they are willing to pay it. This approach also often leaves goods and services sub-optimally priced, as the offer is made on a gut feel. In the parts distribution sector, for example, research has proved that 75% of parts are not appropriately priced. Yet a little precision can go a long way. McKinsey & Company reports that taking action to improve accuracy by as little as one per cent can yield up to an eight per cent increase in profitability. Key to attaining this accuracy is a more analytical approach. A modern pricing strategy has to be dynamic and keep up with the many changes and fluctuations that occur on a day-to-day level. Variability in global economies and market conditions, for example, can affect the cost of manufacturing goods. Fluctuation in production costs can and should be taken into account in the final deal offered. Real-time data analysis is not only important for accurate pricing, however. It is also essential for understanding and managing more complex orders and sales processes: what does the customer really want and what offerings really close sales? Many factors make up negotiations and go towards making a deal attractive. This might include bulk deals, consulting services, more frequent deliveries, financing options, service and support agreements and in-house training. Offering the best price as part of the overall package does not necessarily mean offering the lowest. When it comes to companies looking for more complicated, longer-term offerings, while companies like Amazon Supply can offer low prices, smaller and more traditional enterprises can make better business partners. Their ability to negotiate deals on hundreds or even thousands of items and tailor complex, repeat packages means they can concentrate on meeting the needs of the customer and therefore do not have to compete on price alone. Building the right deal also helps customers spread costs over extended periods of time and helps the seller avoid one-time operational expenses. Right-sizing the deal is also essential for smaller businesses, stripping offerings of unnecessary fixed costs. Most SMEs are sitting on a treasure trove of sales data that can help them understand how to scale and right-size their deals. Using this data is key.

Businesses must focus on gathering and utilising their available sales information and processing it intelligently in order to extract as much significance out of it as possible. When staffing is limited and time is precious, automating data mining saves resources and gives smaller businesses a framework for systematically guiding strategic business decisions. Turning sales and pricing from an art form into a science is essential to profitability. Real-time, end-to-end pricing strategies give smaller companies business knowledge and power. Pricing optimisation is not a tool for big business only. It enables companies to compete on a more level playing field with much larger competitors. It can offer smaller businesses the same kinds of benefits and opportunities for growth that business intelligence and Enterprise Resource Planning have done for larger enterprises in the past. A clear and accurate understanding of real costs will lead to better profit margins and a more effective way to head off the competition, from wherever it may come.

Intelligent pricing is one of the most important elements of any successful business venture. Yet many entrepreneurs fail to educate themselves adequately about various pricing components and strategies before launching a new business. Smart small business owners will weigh many marketplace factors before setting prices for their goods and services. As the Small Business Administration (SBA) indicated in The Facts About Pricing Your Products and Services, "you must understand your market, distribution costs, and competition. Remember, the marketplace responds rapidly to technological advances and international competition. You must keep abreast of the factors that affect pricing and be ready to adjust quickly."


There are three primary cost factors that need to be considered by small businesses when determining the prices that they charge for their goods or services. After all, price alone means little if it is not figured within the context of operating costs. A company may be able to command a hefty price for an item, only to find that the various costs of producing and delivering that item eliminate most or all of the profit that it realizes on the sale. It should also be noted that service businesses often find it more difficult to accurately gauge their costs, especially in the realm of employee hours. A freelance copyeditor may find that one 2,500-word article takes twice as long to complete as another article of the same size because of differences in quality that are often difficult to anticipate ahead of time.


costs consist of the cost of the work that goes into the

manufacturing of a product or the execution of a service. Direct labor costs can be figured by multiplying the cost of labor per hour by the number of employee-hours required to complete the job. Business owners, however, need to keep in mind that the "cost of labor per hour" includes not only hourly wage or salary of the relevant employees, but also the costs of the fringe benefits that those workers receive. These fringe benefits can include social security, retirement benefits, insurance, unemployment compensation, workers compensation, and other benefits.
MATERIAL COSTS Material costs are the costs of all materials that are part of the final

product offered by the business. As with labor, this expense can apply to both goods and services. In the case of goods, material costs refer to the costs of the various components that make up a product, while material costs associated with services rendered typically include replacement parts, building parts, etc. A deck builder, for example, would include such items as lumber, nails, and sealer as material costs.
OVERHEAD COSTS Overhead costs are costs that cannot be directly attributed to one

particular product or service. Some business consultants simply refer to overhead costs as those business expenses that do not qualify as labor costs or material costs. These costs include indirect expenses such as general supplies, heating andlighting expenditures, depreciation, taxes, advertising, rental or leasing costs, transportation, employee discounts, damaged merchandise, business memberships, and insurance. A certain percentage of employees usually fit in this category as well. While the wages and benefits received by an assembly line worker involved in the production of a specific product might well qualify as a labor cost, the wages and benefits accrued by general support personneljanitors, attorneys, accountants, clerks, human resource personnel, receptionistsare included as overhead. Overhead expenses are typically divided into two categoriesfixed expenses and variable expenses. Fixed expenses are regular (usually monthly) expenses that will not change much, regardless of a company's business fortunes. Examples of fixed expenses include rent, utilities, insurance, membership dues, subscriptions, accounting costs, and depreciation on fixed assets. Variable expenses are those expenses that undergo greater

fluctuation, depending on variables such as time of year (for seasonal businesses), competitor advertising, and sales. Expenses that are more heavily predicated on company revenues and business owner strategies include office supplies, mailing and advertising, communications (telephone and Fax bills), and employee bonuses.
COST OF GOODS SOLD One of the most important tools that accountants and

entrepreneurs use to gauge the health of businesses is the "cost of goods sold." This figure is in essence the business's total cost of manufacturing the products it sells or in the case of retail firmsits total expenditures to purchase products for resale. Delivery and freight charges are typically included within this equation. Cost of goods sold provides business owners with a rough measurement of their gross profit margin. The figure usually bears a close relationship to sales, but it may vary significantly if increases in the prices paid for merchandise cannot be offset by increases in sales prices, or if profit margins swell because of special purchase deals or sudden surges in product popularity.

Small businesses have many different pricing strategies from which they can choose, but they need to select carefully. An ill-considered decision can place a heavy burden on the business.
MANUFACTURER'S SUGGESTED RETAIL PRICE Many small businesses prefer to simply

price their goods in accordance with the manufacturer's suggested retail price. They thus eliminate costs associated with making their own pricing decisions or pursuing more proactive pricing strategies. Critics note, however, that this strategysuch as it isis utterly heedless of the competition, which may be able to offer a lower price for any number of reasons.
PRICE BUNDLING This is the practice of giving the customers the option of buying

several items or services for one price. A furniture retailer, for example, might offer customers a sofa and love seat combination at a price that is somewhat lower than what the two goods would cost if bought separately. Similarly, a landscaper might lure customers by offering two free months of lawn maintenance with any major landscaping

job. Leonard Berry and Manjit Yadav noted in Sloan Management Review that bundling has several advantages, especially for service-oriented businesses: "The cost structure of most service companies is such that providing an additional service costs less than providing the second service alone. A second benefit of bundling that appeals to customers is purchasing related services from one service provider. They can save time and money by interacting with an paying one provider rather than multiple providers. Third, bundling effectively increases the number of connections a service company has with its customers."
MULTIPLE PRICING Similar to price bundling, multiple pricing is the practice of selling

multiple units of an item for a single price. A grocery store that offers two boxes of macaroni and cheese at a single price, for instance, is engaged in multiple pricing. Whereas price bundling is more commonly employed for big-ticket items, multiple pricing is usually used to sell inexpensive consumable items such as razor blades, shampoo, household cleaning products, and food and beverages.
COST-PLUS PRICING This methodology, popular with manufacturers, involves adding

together all labor, material, and overhead costs (the "cost") and then adding the desired profit (the "plus").
COMPETITIVE PRICING Some small business owners choose to base their own prices on

the prices of their principal competitors. Business owners who choose to follow this course, however, should make sure that they look at competing businesses of similar size and strength. "It's very chancy to compete with a large store's prices," noted the SBA's The Facts About Pricing Your Products and Services, "because they can buy in larger volume and their cost per unit will be less. Instead, price products based on your local small-store analysis, then highlight other competitive factors, like personalized customer service and convenient location." Competitive pricing among service-oriented businesses, meanwhile, is a hazier proposition, since the nature and quality of services offered can vary so widely from business to business. Still, it is often employed, if only as a general pricing guideline.


PRICING ABOVE COMPETITION If a business is operating in a community in which low

prices are most customers' primary concern, then this pricing strategy is obviously doomed to failure. In settings in which price is not the customer's most important consideration, however, some small businesses can do quite well employing this strategy. The key to making "pricing above competition" work, say experts, is to provide customers with added benefits that justify paying the higher price. These benefits can take the form of: 1) convenient or exclusive location; 2) social status; 3) exclusive merchandise; and 4) high level of service. The latter can take the form of home or office delivery of goods, service and/or product knowledge, speed of service, attractive return policies, and friendly atmosphere. Some business owners also boost prices in markets that have few competitors, reasoning that the community has little choice but to buy from their businesses. Such prices rarely reach outrageous levels, but they can become sufficiently high that enterprising entrepreneurs will recognize an opportunity to undercut the business with more inexpensively priced goods or services.
PRICING BELOW COMPETITION Pricing below competition is the practice of setting

one's prices below those of its competitors. Commonly employed by major discount chains such as Wal-Martwhich can do so because its purchasing power enables it to save on its costs per unitthis strategy can also be effectively used by smaller businesses in some instances (though not when competing directly with Wal-Mart and its ilk), provided they keep their operating costs down and do not spark a price war. Indeed, the smaller profit margins associated with this pricing strategy make it a practical necessity for participating companies to: exercise tight control over inventory; keep labor costs down; keep major operational expenses such as facility leases and equipment rental under control; obtain good prices from suppliers; and make effective use of its pricing strategy in all advertising.
PRICE LINING Companies that engage in

this practice are basically hoping to attract a

specific segment of the community by only carrying products within a specified price range. This strategy is often employed by businesses whose goods/services or location are likely to attract upscale buyers, though others use it as well. Advantages sometimes


accrued through price lining practices include: reduced inventory and storage costs, ease of merchandise selection, and enhanced status. Analysts note, however, that this strategy frequently limits the company's freedom to react to competitors' pricing strategies, and that it can leave businesses particularly vulnerable to economic trends.
ODD PRICING Odd pricing is used in nearly all segments of the business world today. It

is the practice of pricing goods and services at prices such as $9.95 (rather than $10) or $79.99 (rather than $80) because of the conviction that consumers will often round the price down rather than up when weighing whether to make a purchase. This little morsel of pricing psychology has become so universally employed that many observers question its value; still, the practice remains widespread across the United States (and elsewhere). Other commonly used pricing policies include penetration pricing and skimming pricing (for manufacturers) and loss leader pricing (for retailers).


Entrepreneurs encounter numerous considerations that should be weighed when assigning a price to their goods or services. These considerations range from the needs and desires of target consumers to general economic conditions. The SBA cited the following factors as among the most important to consider when arriving at a pricing strategy.


Since pricing is one of the single most important factors in determining whether a business will be successful, small business owners should continuously review their pricing policies to make certain that they remain in keeping with marketplace realities. Business environments can change quickly, and the successful entrepreneur will learn to change his or her pricing strategies accordingly. William Cohen, author of The Entrepreneur and Small-Business Problem Solver, described six different circumstances in which small business owners should review their pricing and make changes if necessary: 1) when introducing a new product or product line; 2) when


testing for the best price; 3) when attempting to break into a new market;4) when competitors change their prices; 5) when general economic conditions become inflationary or recessionary; 6) when weighing major changes in sales strategy. Indeed, any significant change in any aspect of a business's operationsfrom rising costs of raw materials to changing insurance premiumsshould spark a review of company pricing strategies.


Economists, business owners, and other people engaged in the world of commerce have long recognized that historical events can help business owners evaluate current business plans and propose future strategies, including pricing strategies. Indeed, as Robert Pindyck and Daniel Rubinfeld observed in Microeconomics, "we often want to compare the price of a good today with what it was in the past or is likely to be in the future." Such comparisons are meaningless, however, unless those prices are measured "relative to the overall price level. In absolute terms, the price of a dozen eggs is many times higher today than it was 50 years ago, but relative to prices overall, it is actually lower. Therefore, we must be careful to correct for inflation when comparing prices across time. This means measuring prices in real rather than nominal terms." Pindyck and Rubinfeld go on to define the nominal price of a good (its "current dollar" price) as its absolute price, noting that the nominal price of a quart of milk was 40 cents in 1970 and about 80 cents in 1990. The real price, however, is defined as the price relative to an aggregate measure of prices (usually the Consumer Price Index-CPI). Percentage changes in the CPI measure the rate of inflation in the economy.

Small business owners are often reluctant to raise prices once a good baseline price has been established. They worry that a price increase will alienate customers and drive them to the competition. "Faced with such resistance, a lot of businesspeople are tempted to forgo price increases altogether, or at least put them off for as long as possible. If you do either one, however, you're making a big mistake," Norm Brodsky wrote in Inc. "Your profit margins will be shrinking. You're gradually undermining the


perceived value of your services or products." Brodsky noted that many of a small business's costssuch as payroll, insurance, and utilitiestend to rise every year, slowly cutting into profit margins. In addition, customers tend to associate price with quality. A business that does not increase prices to keep up with the competition risks being regarded as the cheap alternative in the marketplace. When price increases are implemented gradually and cautiously, small businesses may be able to keep their customers happy while also keeping their profit margins intact. After all, as Harry J. Plack wrote in the Baltimore Business Journal, customers typically base their purchase decisions on more than just price. Other factors influencing the decision process include quality, features, guarantees, and personal desires. In addition, people will always pay more for good, reliable customer service. In order to make an effective price increase, Howard Scott of Nation's Business recommended conveying the reasons for the increase to customers and giving them a perceived increase in value for their money. "The message for companies is clear," Scott wrote. "Those that differentiate their products from the competition's and are able to articulate that difference to customers are more likely to be able to raise pricesand keep them raisedabove the competition's."


Major discount stores such as Wal-Mart, Sam's Club, Target, K-Mart, Office Depot, Staples, Best Buy, and Circuit City have gained control of large blocs of the American business world over the last several years on the strength of their one-stop shopping and discount prices, the latter a result of their ability to buy goods at bulk rates. Many small business owners have felt the impact of these storesindeed, cautionary tales concerning the impact that such stores can have on formerly vibrant downtown shopping areas have proliferated in recent years. Many observers believe, however, that some small business failures that occurred in the wake of these titans' arrivals could have been avoided if small business owners had adopted different strategies to deal with the new competitive environment in which they


were operating. Indeed, economists and business analysts agree that most small businesses cannot compete with large chains in the area of price; the bulk-rate buying power advantage that the big stores enjoy is simply too great to overcome. But they contend that many small businesses can still co-exist with these titans if their owners outmaneuver the big stores in other areas. Effective strategies that can be used to help negate the discount pricing strategy employed at the big chains include:

Emphasize value and personal service rather than price Offer attractive ancillary services (home and office delivery, generous return policies, etc.) Define your market segment or niche and devote energies accordingly Control inventory Streamline to eliminate less profitable areas of business Target advertising and promotions to reach the most likely customers Steer customers to the most profitable aspects of your business Establish your business's industry knowledge as an additional resource for customers Build strong relationships with vendors Meet or beat prices of big discounters on selected lead items or services Make intelligent use of price strategies such as price bundling.

Of course, pricing remains a very big component in determining a company's success or failure. "The key to success," concluded the SBA in its Pricing Your Products brochure, "is to have a well-planned strategy and established policies and to constantly monitor prices and operating costs to ensure a profit." Finally, the SBA cautioned entrepreneurs to "remember that the image of your business is crucial to obtaining and keeping the clientele and that your pricing structure and policies are a major component of your image."

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Companies of all sizes will need to re-evaluate old business assumptions and adapt to new conditions. People of all income and demographic levels are reducing compulsive spending and carefully looking for value and products that provide greater meaning to their lives. Business Trend: Mighty Millennials Millennials, also known as Generation Y, born between 1978 and 2000 are 75 million strong. This cohort has lived the digital life and their entrance into the workforce has enabled them to be more adaptable, collaborative and innovative than any other generation. Whats more earth shattering about this generation is their diversity and how they embrace all cultures, classes and community. Neil Howe has been a great predictor of generational impact on American society. Howe sees us entering a crisis point and the Millennials will lead the country out of this mess. Businesses will have to embrace the youth unlike never before. Business Trend: Clean and Green Green business is nothing new yet what is different is its now becoming a central business movement for many companies including the stodgy automakers. Given a presidential push, the green movement has accelerated into overdrive. With billions in government stimulus and venture capital, the earth friendly companies in bio fuels, solar, wind and more will stand to reap big rewards going forward as the face of commerce changes for the benefit of Mother Earth. These four business trends will pose a challenge for business and society as a whole. What we see now is an entire restructuring of the world as we know it. Business will need the agility and adaptability to ride these trends into the future.

Top 10 Small Business Trends for 2011

***Update: our Top 10 Small Business Trends for 2012 is now available.*** Continuing our annual tradition, below is our Top 10 Small Business Trends list for 2011. To see our past lists, click on the year: 2010, 2009, 2008. Our overall economic outlook is for continued moderate growth with U.S. GDP increasing 3%-3.5%. While we expect hiring and the job market to improve, unemployment will remain stubbornly high, finishing the year around 9.2%. Economic 1. The Small Business Economy Recovers from the Great Recession: Despite the Great Recession officially ending in 2009, and moderate overall U.S. economic growth in 2010, the small business sector of the U.S. was still in recession last year. We're optimistic the economy will continue to improve in 2011 and economic


growth will be more widespread. In 2011 small businesses will see stronger demand and better business conditions, resulting in the small business economy emerging from the Great Recession. 2. Variable Cost Business Models: Small businesses will continue to focus on cost containment, bootstrapping and business flexibility in 2011. More small businesses will shift from fixed cost to variable cost business models, adopting a payas-you-go approach to minimize cash requirements and increase business agility. Fixed costs and fixed assets will increasingly be avoided. Small business outsourcing and the use of contingent workers in place of full time employees will increase substantially. 3. Small Firms Reinvent U.S. Manufacturing: The recovering economy and 4 key trends are driving the growth of small and micro manufacturing, redefining how we think about manufacturing: (1) technology and variable cost business models are making it cheaper and easier for small and micro businesses to manufacture niche and customized products; (2) the weak dollar and rising overseas costs are making U.S. manufacturing cost competitive; (3) developing world economic growth is leading to stronger export opportunities; and (4) the Internet and online systems are improving the ability of small manufacturers to find, sell and support customers. 4. Alternative Financing: While the improving economy is leading to increased small business access to financing from banks and other traditional sources, capital will still be tight in 2011. This will lead to increased use of alternative credit sources merchant advances, micro-lending, community lending, crowd funding, factoring, etc. Online micro-lending in particular will see a substantial increase in 2011. Social and Social Media 5. Social Media Moves to the Small Business Mainstream: Despite the hype, the vast majority of small businesses haven't used social media on a regular basis for business purposes. This is changing as small business users become more comfortable with social media, its benefits become clearer, and social media's positive results become more obvious. The growth of social commerce (see 6 below) and Facebook (see 7 below) are key drivers of the growing interest in and use of social media by small businesses. 6. Social Commerce:The amazing growth of Groupon and other social commerce sites in 2010 heralded the shift towards the integration of social media and sales. 2011 will see this this field continue to explode as small businesses see clear, measurable, positive results from their social commerce/media efforts. 7. Small Businesses Friend Facebook: The epic growth of Facebook is hard to overstate. With over 500 million active users, including 200 million mobile users, Facebook has passed Google and become the Web's most visited site. Small businesses are embracing and adopting Facebook as a key part of their web presence, and in growing numbers using Facebook as their primary website.


8. New Localism Continues to Flourish: Driven by changing demographics, new technology, economic pressures and growing concerns about the environment, more Americans are focusing on their families, friends and local communities. Small businesses benefit from the growing number of locally-oriented customers and the opportunities created through "Buy Local" campaigns. New localism was on our list last year. It is a long-term trend whose impact has been accelerated by the recession and makes the list again this year because of its growing importance. 9. Freelancers Realize They're Small Business Owners: The last few years have seen strong growth in the number of contingent workers - freelancers, part-timers, temps and contractors. Many of these new contingent workers are embracing freelancing and choosing to stay contingent. Others will stay contingent due to a lack of options. Both groups will increasingly see themselves as long term freelancers and realize to be successful they will need to view themselves as small business owners. This shift in thinking will improve their businesses and result in a stronger, more successful freelance community. Technology
We see 2011 being a year of technology maturation and consolidation. By that we mean a number of technologies that have been impacting small businesses for several years are becoming mature and mainstream. Because of this, we are going to limit our technology trends to one broad trend.

10. Working in the Cloud: No trends list would be complete without mentioning mobile, cloud, local and social computing. While each of these trends is important, the growing convergence of these trends and technologies is amplifying their impact and fundamentally changing how business is done. Work is moving to the cloud, and small businesses are embracing this shift and related technologies.