Numeracy – Thinking in Numbers

 Managing Your Numbers is Essential for Growth

NumeracyDo you want to do everything you possibly can to ensure the survival and growth of your company? Of course you do. Well, one of the most essential skills that you can bring to your company is understanding, tracking, and using certain numbers.

This numeracy–thinking in numbers–is a vital, vital skill.

Let me explain. In my experience, far too many people feel that they aren’t good at math, or didn’t take accounting, or whatever. Using this as an excuse, they hire someone else to watch the numbers for them. This is two mistakes in one. First, they’re selling themselves short. Anybody can work with numbers, and the kind of number-tracking I’m talking about requires no advanced mathematical training or professional degree. Second, there’s no substitute for you in this process. Nobody else out there is as motivated as you are to get the numbers working on behalf of your business.

Yes, your accountant can prepare your P&L statements, tax returns, and balance sheet and offer certain kinds of advice based on rules-of-thumb and industry norms. (By the way, an accountant with lots of experience working with companies like yours can be a gold mine of comparative information.) But you simply can’t count on quarterly meetings with your accountant. In order to run your company properly, and dramatically reduce your risk of failure, you need to get access to certain numbers quickly, and use those numbers effectively.

Here are the numbers you should have at your fingertips:

  • a snapshot of the company,
  • cash flow statements that are regularly updated,
  • cost analysis of your product(s),
  • break-even analyses, both for the company overall and for each new product.

Here I will only discuss the snapshot of the company. My goal is to get you comfortable with these numbers–by which I don’t simply mean that you’ll be able to generate them, but that you’ll understand them and be able to adapt and use them effectively. In general, my prescription is, Know and love these numbers! Note, I am not saying you have to prepare the snapshot yourself. When you’re small, you can have your accountant or bookkeeper prepare them for you; and if your company grows to the point that you can afford a chief financial officer, then she will take responsibility for preparing the numbers.

I call the following chart the Company Snapshot because I want to convey the idea that it’s quick to read and absorb. I’ve done it weekly because that’s been the interval that’s proven most helpful to me in my businesses. One manufacturing company I’ve worked with does a similar report daily. Depending on the nature of your business, you might find a bi-weekly report adequate, particularly during slow seasons. In certain situations–for example, where your company is temporarily flush with cash–you may decide that a monthly snapshot is adequate. But you can’t make that decision until you understand the snapshot, and how your company performs against that snapshot. So my advice is start weekly, and adjust as necessary.


Business Incubators Can Be Key to the Success of Qualifying Small Businesses

If you are a start-up company and you qualify, incubators can be a fantastic resource for you in your Bootstrapping pursuit of success. They provide the “help of others” part of Bootstrapping and the “limited resources” component of our initial definition of Bootstrapping (to pursue success with limited resources and with the help of others).

Here is the NBIA (National Business Incubation Association)’s description of Incubators. “Business incubation is a business support process that accelerates the successful development of start-up and fledgling companies by providing entrepreneurs with an array of targeted resources and services. These services are usually developed or orchestrated by incubator management and offered both in the business incubator and through its network of contacts. A business incubator’s main goal is to produce successful firms that will leave the program financially viable and freestanding. These incubator graduates have the potential to create jobs, revitalize neighborhoods, commercialize new technologies, and strengthen local and national economies.”

Critical to the definition of an incubator is the provision of management guidance, technical assistance, and consulting tailored to young growing companies. Incubators usually also provide clients access to appropriate rental space and flexible leases, shared basic business services and equipment, technology support services, and assistance in obtaining the financing necessary for company growth.

Incubators are physical plants that primarily house the offices of start-up companies. They will rent you flexible leases, which can allow you to expand or shrink your space quickly. Rents vary by incubator, but most often are lower than the market rates at the outset. As you grow, you can upgrade to more space. Specifically the Incubator can provide expert advice in areas such as accounting, legal, marketing, and provide more mundane needs such as telephone systems, fax machines, computers, conference rooms, and clean rooms in Tech Incubators. Fees are charged for some of these services and can vary by incubator. Some incubators have no fees but want equity in your company.

Although there are few of them, there is growing interest in purely virtual incubators. They do not have a physical building for clients’ offices. Services are provided on what you might call an outpatient basis and/or online. There are no face-to-face interactions. This virtual model extends incubation services in areas that don’t have a critical mass of entrepreneurs within a reasonable distance of the incubator.

A hybrid incubation program is gaining considerable traction where traditional physical Incubators are extending their services to off site companies. This fits well for home-based businesses and companies that already have their own buildings.

Incubators come in many flavors. Some are only for technology companies. Some are for a specialty technology. Some are mixed use while others are service or manufacturing oriented.

Here are some Incubator facts from NBIA.

  • There are 1115 incubators in the United States.
  • 27% of incubators have investment funds.
  • 61% have links to angel investors.
  • The average stay in an incubator is 33 months.
  • About 6% of North American Incubators are for-profit programs.

NBIA estimates that in 2005, North American incubators assisted more than 27,000 start-up companies that employed more than 100,000 workers and generated annual revenues of more than $17 billion.

Most incubator tenants accept start-ups, as well as existing companies

Besides the above described advantages afforded to incubator tenants, some other positives are:

  • Networking with other entrepreneurs.
  • Getting business from other tenants.
  • Getting assistance from specialists in the community to supplement on-site mentors.
  • Many Incubators are adding insurance for their tenants.

Be forewarned: it is not easy to get accepted into an incubator. You need to meet the criteria of the one to which you are applying. For sure, you need to prepare for your interview with a sound, well thought out business plan. These plans do not have to be lengthy dissertations. Succinct and short are good.

No matter the tediousness of the application process, an incubator acceptance can be a defining moment in your future success.

A study in 1997, funded by the U.S. Economic Development Administration, found that 87% of incubator graduates were still in business three years after leaving the program. This is considerably higher than start-ups outside of incubators.

To find the incubators near you, go to the NBIA website:

About half of the Incubators belong to NBIA. If you do not see one in your area, then contact NBIA. They will advise you of the ones in your locale that may not be their members.

NBIA’s address:

20 E. Circle Drive # 37198

Athens, Ohio 45701-3571

Phone 750-593-4331 Fax 740-593-1996

Franchising – An Alternative to Starting or Buying a Business

Franchising is a type of business arrangement that lies somewhere between buying a business and starting your own business. It involves an agreement between a Franchisor (Burger King, Subway, Mail Boxes etc,) and you, the individual business person, called the Franchisee.

The Franchisor offers their established corporate brand name, experience, expertise, training, support, and proven methodology to the Franchisee. In return, the Franchisee pays an upfront fee and continuing royalties.

I bring Franchising up in the Bootstrapping context as it almost completely solves the experience/know-how part of the limited resources equation. As to the cost part, many Franchises will be clearly out of most start-ups’ reach. However, the franchising industry is so big and diverse that many have a relatively low initial cost. Recently Entrepreneur magazine had an article on 80+ Franchises that required an initial cost of $25,000 or less. (

Franchising is a large business sector. There are over 300 types of business categories supporting over 18,000,000 employees and accounting for 3% of US gross domestic product (GDP). There are many and diverse categories of businesses available for Franchising. A partial list of the different franchise businesses is Automotive, Business Services, Children’s Products & Services, Education Financial Services, Food, Health Care, Home Improvement, Hotels & Motels, Maintenance, Personal Care, Pets, Recreation, Service & Tech businesses, and more every year.

Jeffrey Tannenbaum, the former Wall Street Journal’s expert on Franchising, described franchising as a mixed bag. He said, “For many people becoming a franchisee is the shortcut to prosperity, but for others, it is the shortcut to hell.”

Let’s look at the pros and cons of franchising.


  • Allows you to be in your own business with a limited knowledge of the industry and of running a business. You get the advantage of the Franchisor’s proven track record of success, their training, their operating methods, their suppliers, their credibility, their ongoing support, etc.
  • Some major risks of business failure are reduced.
  • Quick start to get your business operational. Every facet of starting and running the business is provided to you. An entrepreneur, starting on his or her own, would take considerably longer to begin.
  • Expansion:  If you become successful, you can expand quite rapidly through the expertise and cooperation of the Franchisor. They are anxious to discover successful operators who have proven they have what it takes to grow. Sometimes the Franchisor will block your expansion plans, despite your proven success. If this happens, you can draw inspiration from Sam Walton, the founder of Wal-Mart. Sam’s initial entry to retailing was as a Franchisee for the Ben Franklin 5 & 10 Cent stores. He followed their formula and added his creativity and work ethic to become a leading franchisee. He started to expand in neighboring Arkansas towns. Early on, Sam spotted the advent of retail discount stores. He approached the Ben Franklin management to let him pioneer a discount store under their umbrella. They summarily dismissed him, and Wal-Mart was born. Little did the Ben Franklin management realize how profoundly they would affect retail history.
  • Due Diligence:  Franchising is a highly regulated business. By law, every potential Franchisee upon asking must be provided with a Franchise Disclosure Document from the Franchisor. This will give you details of the arrangement with Franchisees, financial strength of Franchisors, their list of existing Franchisees, and, in many cases, lists of past Franchisees. You want to know everything you can about your potential partner.
  • Training is provided to you and to your employees. The learning curve of running a business is accelerated.
  • In most cases Advertising and Marketing of the brand is provided. In some cases, you may be required to contribute to the costs of it.
  • Territory: You are assigned an exclusive Franchise for a specified geographic area. No one else can use your brand in this defined area. This provision should be specifically spelled out in the contract.



  • Lack of Control: You don’t have the independence of an owner of a business. The Franchisor requires you to strictly follow their rules and to use their systems. Changes require approval. You are also limited in where to buy your supplies, how to advertise, which products you can and cannot offer, volume goals, etc. The arrangement can be frustrating for a creative personality.
  • Costs can be high, both the initial fee and ongoing royalties. However, costs are never to be considered in a vacuum. They need to be measured against the profits you create.
  • Royalties are paid on volume and not on profits in most instances. This is usually not a great arrangement as one party can lose money while the other profits. Their interests are not aligned even though it is a partnership.
  • Inequality: It is an unequal partnership. The Franchisor has much more power. If the Franchisor does not deliver on their support promises, you may not have much recourse, as most contracts favor the Franchisor. Also, you may not have the money to pursue your expensive legal options.
  • Selling the company may be difficult. Let’s say you’ve been successful over the years in building the franchise and want to now retire or change your lifestyle. In an independent business, you are completely free to sell to anyone at any price you desire. This is not necessarily so for a Franchisee. Some contracts won’t allow you to sell, or you can only sell back to the Franchisor. This might not allow you to get a fair price. So, you should try to address this issue in your original contract.



In determining if Franchising is for you and which ones best fit your pocketbook and passion, you can go to the following sources:

  • Google: Just search for Franchising, and you will get enough sources to look at to keep you busy for a lifetime.
  • is the website of Entrepreneur magazine which puts out a yearly issue of the top 500 Franchises. They offer a list by category and by costs. You can get a brief outline of each Franchisor and their website for more information.
  • FTC: The Federal Trade Commission is the government regulatory body for the Franchising industry. The FTC website is  They are located in Washington, DC, and their phone number is 202-326-2222.
  • The American Franchising Association (AFA) is an industry association located in Washington, DC. They have lots of information about Franchisors and the industry. Their website is Phone number is 202-628-8000.
  • This website lists a multitude of Franchising opportunities with descriptions of each. You can check up to 10 of them, and with one click, your request for more information goes out to each company. I found that I received the same day replies from all that I clicked, with phone calls from them starting the next day.
  • is the website for Inc. magazine, the publication for entrepreneurs. They have extensive information about Franchising and lists of questions to ask a potential Franchisor.

With a lot of due diligence, Franchising may be the low risk, low cost way to become your own boss.

Mentors – Free Small Business Consulting

One of the best ways to start and grow a small business is to get expert advice. I’m not referring here to paid consultants, a luxury that most early stage and small companies can’t afford. (When you can afford the right ones, by the way, they can be an excellent investment.) Instead, I’m referring here to getting a mentor of one kind or another.

I did 27 in depth interviews with successful entrepreneurs in writing my book, Low Risk, High Reward. They came in all flavors and sizes. When I asked them what factors they would attribute to their success, the almost unanimous answer was that, early in their career, they had a mentor. Bud Pironti of NSI, a direct response company, was particularly passionate on this subject, and he credits a great deal of his early and continued success to the mentors he’s cultivated over the years. (His wife accuses him, jokingly, of “collecting antique men.”) Bud stresses that you have to work at these relationships. If you’re sincerely humble and solicitous, he says, you’ll get back your investment five times over.

What does this mean? It means simple things like saying thank you to your mentor and following up to let that person know what happened when you pursued that lead he gave you or when you tried out that idea she suggested a few weeks ago.

Where do you find mentors? The answer is, “Lots of places including unexpected ones.” The senior managers of your suppliers may be fertile ground, or perhaps people you’ve worked with in the past, or college professors, or publishers of industry magazines. Entrepreneurs who own their own businesses are ideal mentors. They’re easier to approach than many corporate managers, and they’ve already been through much of what lies in store for you. Join your local Chamber of Commerce and be active. A mentor-in-waiting can be there.

“Surround yourself with people,” entrepreneur Earl Peek advises. “People whom you can call upon for different things. Get someone you can bounce things off of—someone you trust. Get someone with scrapes on his knees, someone who’s lost something. The best advice you can get is from someone who’s been through something bad.”

Again, mentors are everywhere. Think about the people you respect. Can you call upon one of them for advice? Could you build on that relationship over time?

When I talk to young people at business schools who want to start their own companies, I often feel their intense frustration at not having experience and having no way to get the experience they need. (You have to have a job to get a job as the old Catch-22 goes.) But I tell them that youth and inexperience are actually great cards for them to play. There are lots of experienced, successful business people who are more than willing to help young entrepreneurs if they are approached respectfully. They want to help, and they know that in many cases, teachers learn as much as students.

Another mentoring possibility is SCORE, which is a non-profit, founded in 1964 and funded in large part by the Small Business Administration. Go to to find a chapter near you and how to access their free advice.

A major source of free advice is a Board of Directors—or the equivalent. I use that qualifier because if you’re a small business, you probably don’t want to incur the cost of directors’ insurance. (This is a must if there are other stockholders involved.) To get around this, call it a “Board of Advisers.” But this name change doesn’t mean you should take the creation of such a board lightly. No, this board doesn’t have the right to get rid of you and hire your successor—as does a formal board of directors—but you should consider it a serious obligation nevertheless. Run it in a formal way, and make sure it deals with the same matters as a traditional board of directors. (In most cases, this means policy-level questions rather than operational issues.) Share the numbers. Put together a binder of relevant materials, perhaps including both historical information and forward-looking material, and prepare an agenda. Then send it to the Board well in advance of the meeting. Don’t think you are too small for a board.

You can solicit retired executives or entrepreneurs, suppliers or anyone else whom you respect and who might have skills or knowledge that would complement your own for board members. Offer to pay their expenses and—when you can afford it—a nominal fee. (If you make products, think free samples!) Do everything necessary to make this work for you. It’s a great discipline, and it can help you focus on tomorrow’s problems. Be prepared to take criticism. Remember: that’s why you invited them.

Depending on where you’re located, there may be other similar resources available to you. If there aren’t, try thinking a little “sideways.” Is there an inventors’  or entrepreneurs’ club in your city? Maybe you’ll find some kindred spirits there—or at least, some original thinking. Find other entrepreneurs to talk to! Keep Learning!

Universities – How They Can Help Your Small Business

Professors at schools prefer to assign real life problems to their students. At most graduate business schools, they assign students singly or in teams to analyze a real company in their city. The other subject areas like engineering, graphic design, advertising, etc., are also looking for real life assignments for their students.

If you have a product that needs to be engineered, you can approach the professor teaching that subject to ask if students can be assigned to your project. They’re usually happy to comply. Most often there is no charge to you. Increasingly, more schools will charge a royalty if it’s a product you plan to commercialize. That is still a good deal as there should be no guarantees or up front royalty payment. (A Variable Expense)

We would go to the local design school to get a package for a new product developed. We might give a modest monetary prize to the student with the best design. More importantly, we would put their name on the package…great resume builder for the student. You might go to the local college or graduate business school and ask the Entrepreneurship professor if one of their student groups can come up with a business plan for your fledgling company. If you have a legal problem, approach the law school.

One year, we approached the engineering school at a major university to develop a savings bank with all kinds of bells and whistles. We wanted it to keep track of all the money in the bank at any moment, to play a song when money was deposited, to have a tabletop look, etc. For us this was a high tech project. For them it was a piece of cake. They were happy to take on the project as it was a real life situation.

In a recent survey I did with professors of Entrepreneurship, I discovered that a high percentage of them already have programs where teams of students are assigned to assist an existing company in solving its problems. The professors go into the community to find companies who want this help and who will cooperate with the students. They more than welcome companies coming to them to participate in this program. There are some smart young people involved who have a very open minded approach to solving problems and developing ideas. They are not constrained by the past. This is another cost free opportunity for assistance in developing your company.

Whatever your project, you should give serious thought to exploring the schools in your area for help. It can be an excellent cost-free solution. I believe your chances would be higher in schools that have a dominant position in the community. Helping the small guy while offering a good learning experience is a compelling proposition for a teacher.

A bonus for you is that you can find some great interns for your company during the summer months or school year. Some may turn out to be excellent hires.

Why Small Business Can Succeed in a Tough Economy

In many of my blogs and articles, I’ve emphasized that the key to starting and maintaining a successful small business is to find, sell, and satisfy customers. If you can do this, I believe there are lots of opportunities for new start-ups and growth, despite the condition of the economy. I read a story this week in the New York Times that illustrates this concept clearly. I have reproduced it in its entirety.

There are two quotes in the article that I would like to bring to your attention:

Referring to the right store she found. . .”where people who are making far from royal salaries still care about doing their jobs well. They even knew my name.”

Referring to why she makes it a point to patronize this “nice” store…”because being nice matters a lot in this brave new entrepreneurial world.” (Small things make Happy customers)


Finding Community, Even in a Chain Store


Published in The New York Times: February 18, 2012

It is two minutes before 9 at night. The Staples store I use, for tasks I once did in an office, closes at 9. After I press my face to the glass door, pleadingly, holding work that must be finished tonight, the kindly manager lets me in. Then I join a half-dozen others still busy inside, at the copier or the scanner, dropping off FedEx packages, or picking up their new business cards with amorphous job titles.

I used to go to a different office supply store. Then came the day it ran out of FedEx envelopes. Oops, the store employee at its FedEx counter said, directing me to his counterpart at its United Parcel Service station. There, no one mentioned that it, too, had run out of padded envelopes. Then, without a word of warning, an employee put the CD I was sending, containing a video of a speech I had made, into a plain manila envelope, tagged it with its destination and rang up the bill in record time.

But, I explained, the CD would never get to its destination in one piece the way it was packaged. “Sorry for the miscommunication,” I said. (Yours, not mine, I muttered to myself — but not out loud, being a believer in honey rather than vinegar.) “Please give me my money back and I’ll take it elsewhere.”

“No you won’t, lady; it’s already rung up.”

“Yes, sir, I will take it elsewhere. I clearly asked for a padded envelope and an important job depends on this.” Anger, hard as I fought it, rose in my throat.

The argument that ensued is best not described here. In any case, I was too cheap to take back the overnight package I’d already paid for. The CD — for a potential client to view before deciding whether to hire me for a speaking engagement — indeed broke en route. I did not get the job.

Then I went looking for a new store to patronize.

This is my brave new world of entrepreneurial life, which began after I took a voluntary buyout from The New York Times in 2008. After working as a reporter and correspondent for 29 years, I was eager for a midlife adventure.

After I left, though, it felt strange not to work in an office, with its regular hours, bosses and, most important, co-workers and a sense of community. I joined the legions of solo operators who took their computers to places like Starbucks, seeking the sound of other people breathing. We knew the mental-health danger of staying home for weeks in the same dirty terrycloth robe, talking only to our animals.

I missed my office friends a lot. But I expected that. What I didn’t expect was how much I missed the copy machine, the scanner, the FedEx pickup, and the I.T. guy, whom I didn’t have to pay to repair equipment.

Could I have bought all the necessary machines for my nifty home office? I could have, though it would have been very expensive, and it’s a tight fit in there already. Besides, I hate gadgets, so the fewer the better.

Could I call for home pickup from U.P.S. or open a FedEx account? I guess I could. But I like going to Staples, now that I’ve found the right one, where people who are making far from royal salaries still care about doing their jobs well. They even know my name there.

There used to be a neighborhood store, Office Inc., but it closed as the big chains grew. I loved Office Inc. For years after it was gone, I’d see the owner around town and embarrass myself by tearing up. The sight of her would make me think that the bad guys, in some I-don’t-know-where corporate headquarters, had won.

Yet each big-box store, once you get past the fact that it looks the same as the others, has its own personality. The one I use now, with the manager who lets me in at two minutes till 9, has employees who help people slide balky credit cards through supposedly self-service fax and copy machines. It has a middle-aged woman selling computers because other middle-aged women don’t like doing business with dudes who call them Ma’am, or who condescend to them as if they don’t understand speedy technospeak, or who don’t even answer questions because their iPod buds are in their ears.

WOULD I choose to be in a Staples at 9 p.m. if I could help it? Not on your life. At times like this, I miss the perks, shrunken though they may be, of being a lifer in a big corporation.

But even out here in each-man-for-himself-land, there is kindness and camaraderie. That’s why I make it a point to patronize this “nice” Staples: because being nice matters a lot in this brave new entrepreneurial world.


Pricing For Profit

One of the most important aspects of launching and growing a successful product is correct pricing, one of the major components of profits. The right price gets you an order and maximizes your chances for reorders. The wrong price—on the low side—leaves valuable profits on the table. The wrong price–on the high side– may decrease your orders, your chances for getting reorders, and invite competition.

This may not appear to be a Bootstrap strategy. It is included because a high percentage of businesses do not give enough attention to this important profit element. They too quickly determine price by their costs or by what competition or perceived competition is doing. The result is that profits are left on the table, or more succinctly, you are depriving yourself of precious cash…your life blood.

All too often, companies put a selling price on their product or service when they’re under some sort of time pressure—for example, when they’re dying to rush out there and get some orders. It’s not until later that they discover they didn’t account for some important costs in that selling price. These costs might include commissions (yes, people forget commissions), extra trade discounts in key markets, displays, servicing, advertising, or whatever. Now comes the trap: in many cases it’s very tough to raise prices. (We’ll return to this shortly.) So they find themselves stuck with a low-margin item or without the money to run a successful marketing program.

Think of pricing as a balancing act. If you have a unique product, a patentable product, a time advantage, a manufacturing edge, or some other kind of competitive advantage, you can and should get a higher than average margin. At the same time, your high margins may hurt your sales and are very likely to act as a beacon for competitors or knock-offs.

In light of these many calculations, I suggest that you involve all the relevant constituencies within your company in initial pricing discussions. Your accountant may claim that this is his/her domain exclusively. If so, don’t let him/her win this argument. Salespeople, production personnel, and even your key customers can provide valuable insights into the pricing decision. You as the manager have to balance these sometimes competing interests and arrive at an appropriate course of action. Notice that I didn’t say the “right” course of action. In many cases there’s more than one legitimate pricing strategy that can be pursued.

Pricing needs to be revisited regularly. You may find that in order to maintain your margins, you are under pressure to raise your prices. Be forewarned though that you may have major customers who won’t accept price increases despite your increased costs. This is particularly true with large quantity buyers. The small company does not have the leverage to demand a justified price increase. I would encourage you–with good humor–to ask for this increase, pointing out your increased costs. If your effort fails and you don’t want to hold firm and risk losing the account, you might want to change the product. This change could be accomplished by altering its appearance, adding value to it, changing the package, and even changing the name. Give it a new style number and inform your buyer you are dropping the old one and adding a new one. This can aid a sympathetic buyer who has been instructed by his management to accept no price increases. This way they get around this unfair rule. You should be aware of the fact that if you play hardball and raise your price, you sometimes can win and keep your customer buying the product. Remember it is the buyer’s job to keep pressing for the best price. A lot depends on how important the customer’s volume is to your business and your mental toughness.

There are four major components to creating profits:

  • Selling price
  • Cost of product
  • Overhead
  • Volume

Before you settle on a selling price—especially a price that you may not be able to change easily–here’s a list of the selling price and cost of product components you may want to consider. There are also some strategic considerations to weigh before final pricing is done. Not all factors may apply to your product.

Selling Price

  1. Analyze the uniqueness of your product. What makes your product different? Are you unique and in a hot classification? Or is yours a me-too offering in a declining category, which is unlikely to command good margins? Is it a commodity product, which again will yield poor margins?
  2. Analyze the barriers to entry behind your product. What’s your sustainable advantage if any? Is it easy for anyone to replicate your business model or copy your products?
  3. Think life span. The shorter your product’s expected life span, the higher your margins should be. Remember that “life spans” apply not only to products but also to whole classes of products.
  4. Know what your market will bear. Is your product comparable in value to existing products but able to be produced at a lower cost? If so, you might consider pricing close to (or just under) the levels set by your competitors and thereby earning an above-average margin. Alternatively, you could price lower and go for more market share. Whichever way you go, don’t make this decision solely on a predetermined margin over your cost. On products with short life spans, what-the-market-will-bear-pricing can be very effective.
  5. Prepare to be imitated. Do you anticipate copies or knockoffs? If so, how much time do you have before they enter the fray? You may want to start with a higher margin, and then either lower your margin when competition enters the field or knock yourself off with a lower cost version.
  6. Think longer term. Will the success of this product lead to successful spin-offs or follow-up sales? If so, you may want to consider selling this original product at minimal or no profit in order to build and capture the after-market or add-on sales.

The classic example is Gillette pricing low for easy razor sales to capture the ongoing blade business, but there are many others. You can forego short-term profits to break into a new channel of distribution with good long-term growth potential, to help your company’s image, to gain market share, or to send a strong message to your competitors.

  1. Think strategically. This is an obvious follow-on to the previous point. Is there some strategy aside from profit that this particular product may help advance? Is this a case where you know you have lots of good (and profitable) follow-up products to put into the pipeline? Will it help you break into a new channel of distribution? Will it help you get a new sought after customer?

Cost of Product

  1.  Determine all your true costs.
  2. Establish what it takes to be successful in your key markets and with key  customers.Then put a cost on each of these factors. For example:
    • Will you need consumer or trade advertising? If so, to what extent?
    • Will your product require co-op advertising, and if so, what are the standard arrangements in the various markets and customers you’re pursuing?
    • Do distributors play a role? If so, what are their margin requirements?
    • What are the margin requirements of target customers in target markets?
    • Is servicing important, and if so, what is your service strategy?
    • Will you be using specialty reps? If so, what commission will you have to pay?
    • What inventory risks will you have to take? How will you handle guaranteed sales, stock balancing, backup stocks, and reorders?
    • What type of packaging will be required?
    • What display (if any) will be needed?
    • What are the standard payment terms in this market?
    • What’s the integrity level of this market and of your target customers? (Are you comfortable with those levels?)
  3. Determine the up-front, one-time costs involved in coming to market. What volume level will be required to recoup these costs at what price?
  4. Examine your cost to acquire a new customer.
  5. Understand your legal rights and what they may cost you. For example: if your patent or copyright is infringed upon, will you have the resources needed to start and (if necessary) sustain litigation?
  6. Identify your costs at various volume levels. Are there dramatic cost savings that come with volume? If so, what strategies and associated costs can you employ to achieve these volume levels?
  7. Examine the “spread.” What are your payments terms from suppliers as opposed to those you give your customers? The cost of money on the spread should be included in your overall costs and prices.
  8. Keep your eye on that license. If your product is licensed, you probably have both guarantees and royalties to worry about. If the guarantee is high, you may come up short, and you may want to price in light of this potential shortfall.


  1. Determine and prioritize the channel of distribution into which you plan to sell.
  1. Think competition. You’re likely to have competitors and maybe even skilled ones. Will you compete on the basis of product superiority, price, service, quality, advertising, sales coverage, delivery time, or some combination? What costs are associated with this strategy?
  2. Understand the implications of your (limited) finances. If available finances limit your ability to produce and sell your product, then maybe you should opt for smaller, higher-margin markets. (Yes, there are bragging rights associated with “selling Wal-Mart,” but you shouldn’t wind up paying for those bragging rights!)
  3. Understand the implications of your (limited) resources. Again, if selling Target means you’ll sell out your limited run at a relatively low margin, think twice. Shouldn’t you look again at those smaller, higher-margin markets?

It has been my observation over the years that not enough time and brain power go into the establishing of your selling price. Maximum profits are good for you and your company’s health.

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