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Pricing Strategies
Pricing products and services
Setting the right price for your products or services helps you maximise profits while maintaining a
good relationship with your customers. Effective pricing can help you avoid the serious financial
problems that may occur if your prices are too high or low - if you charge too much you may price
yourself out of the market, but if you charge too little you may be underpaid for your work.
Pricing your products or services does not have to be a stressful process. Remember:
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you are in business to make a profit
it is much easier to lower your prices than to raise them
thorough research will help you to establish the right price.
The right price is fair to your customers (i.e. they are willing to pay it) and your business (i.e. you
cover costs and make a profit).
This guide will help you set a fair price for your products and services.
Research your pricing
Your pricing strategy is more likely to be effective if you research 3 key areas. This research will
help you to set prices that:
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cover your costs and make a profit
compare favourably to your competitors
appeal to your target market.
Research your existing costs
Your fixed costs may include the base cost of goods, rent, wages, loan repayments and other
overheads. Remember to take into account any hidden or infrequent costs such as superannuation,
insurance, licensing, adviser fees, and any professional development, training or networking costs.
Your financial adviser or accountant can help you to work out your expected cash flow.
While it may be difficult to reduce costs in some areas (i.e. rent, wages) you may be able to reduce
your purchasing costs if you buy stock in bulk from your suppliers. However, this strategy can be
risky. Research your market thoroughly before buying in bulk to help you avoid any financial, cash
flow, storage or delivery problems that may occur if you can´t sell a large number of products
quickly.
Pricing Strategies
Research your competitors' pricing
Ask yourself:
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What value do customers place on your benefits over your competitors? Do you have a
'unique selling point'?
How do your competitors price their products or services?
Is the market highly competitive or are there few competing businesses? The fewer
competitors there are in a market, the more each is likely to be able to charge.
What do customers value when they decide who to buy from? (e.g. reliability, speed or cost
of delivery)
Researching your competitors can be as simple as looking at the prices on their website, reading
marketing flyers, or phoning to ask for a quote.
You could draw up a table similar to this one to easily compare pricing used by your competitors:
Competitor ACompetitor BCompetitor C
Product 1
Product 2
Service 1
Service 2
If your price is much higher than your competitors, and you are both selling a similar product or
service, you may price yourself out of the market. If your price is much lower, you run the risk of
underselling your services. Both problems can be avoided with thorough research before you set
your pricing.
Research your target market
You must understand how much your target market is willing to pay for your product or service. If
customers believe your prices are too high they will probably buy from one of your competitors. If
they think your prices are too low they may question the quality of your product or service and buy
elsewhere.
Get your pricing strategy right from the start and you will attract customers and make a profit. The
best way to understand your target market is to conduct market research.
Related links
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Use your competitive advantage to help you set your pricing.
Pricing Strategies
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Attend a webinar to improve your skills. You can learn about marketing and customer
service strategies in the webinar 'Attracting new customers to your business'.
Attend a workshop on retaining your profitable customers.
Learn key information about your industry demographics by ordering a PlanSMART kit that
is tailored to your business.
Find out who to contact to research your competitors and your industry.
Learn more about working with business advisers.
Pricing strategies
The pricing strategy you choose will depend on what affects demand for your product or service.
Understanding the pricing strategies available will help you to decide which strategy - or
combination of strategies - is most effective for your business. To help you choose a pricing
strategy, seek advice from your business adviser or accountant.
Factors affecting demand
The demand for your products or services may be elastic or inelastic:
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If the demand is elastic, a change in pricing has a significant effect on the demand (i.e. after a
price rise customers may choose not to buy the product).
If the demand is inelastic, a price change has little effect on demand (i.e. customers will still
buy the item, regardless of the price).
Elasticity is dependent on a number of factors, including:
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Is the product a necessity or a luxury? (medications vs. fine dining)
Are there any substitutes available? (for example, if rice is not available, customers could
buy potatoes instead)
Are there any complementary products? (when the price of one product goes down, demand
for another product goes up, i.e. razors and shaving cream)
Common pricing strategies
Skimming pricing
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Often used for new products and services, especially technology.
The initial price is set high and attracts 'early-adopters' who want the product or service
now and are willing to pay.
Pricing Strategies
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When this group has been satisfied, the price is reduced to appeal to more price-sensitive
customers.
Penetration pricing
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Aims for high sales through a lower price.
Often used for products and services that would not attract an initial elite market.
Discourages competitors because of the low profit margin.
A large target market and a high volume of sales are needed to meet profit goals.
Image pricing
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The perceived image is more important to a customer than the actual price (e.g. a luxury car
that sells for as much as a house).
Marketing should target the high end of the market and communicate the luxury on offer.
Customers are willing to pay top dollar because of the value they place on the product.
Discount pricing
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Aimed at the budget end of the market where customers are willing to forgo some quality or
service for a lower price.
Discounting is a difficult strategy to use long-term - sales volumes must be consistently high
to maintain good profit levels.
Loss leaders
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A product or service sold at a low price where you make little profit - or in some cases, a
loss.
This heavily discounted item should entice customers to visit your business.
While they buy the loss leader, they may also purchase other products or services with a
higher profit margin (e.g. accessories, supplementary items, impulse buys).
Flexible pricing
Your pricing strategy should be flexible. If you sell to multiple markets (e.g. you export to different
countries), you do not need to set a single price across the board. However, remember that if you
sell via the internet, customers will be able to buy at your online price wherever they are (provided
you ship to their area). Learn more about the advantages of selling online.
Another example of flexible pricing is offering discounts for bulk-buying or returning customers.
This rewards customer loyalty, encourages positive word-of-mouth and increases sales in the long
term.
Pricing Strategies
Working out your prices
There are a range of ways to calculate your prices. Use the following examples to help you work out
your prices.
Mark-up
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Take the cost price and add a percentage to all items (e.g. 50%). Talk to your suppliers,
competitors or relevant associations to find an industry standard.
Useful when you have multiple products at different price points and other costing methods
are too complex.
Adjust the mark-up depending on your strategy. For example, if you are using penetration
pricing, you would use a lower mark-up than your competitors.
Sample calculation: cost price of $20 + mark-up of 50% = price of $30
Costing
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Calculate all of your fixed overheads. Add this to the cost of sales (the variable cost to sell
each product or service). Then add the money you would like to make from each sale (your
desired profit).
This is the best method to use to make sure you are maximising your profit, although it can
be time-consuming.
You must have accurate and up-to-date records so you know all of your costs and you do not
have to guess.
Sample calculation: fixed overheads of $50 + cost of sales of $65 = $115 + desired
profit of $30 = price of $145
Pricing Strategies
Charge per hour
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See the below table for a step-by-step guide to working out how much to charge per hour.
Useful when you are delivering a service rather than a product.
It is easy to overestimate the number of hours and days you have available to work. Take all
of your leave into account.
A
1. Calculate
Work hours in a
maximum number
week
of hours available
38
2. Deduct time off
C
(Public holidays &
annual leave)
(30 days x 8 hrs) =
240 hrs
3. Calculate total
turnover or sales
required per year
E
(Estimated annual
overheads)
$32,000
4. Calculate charge
per hour
B
Weeks in a year
52
AxB
Work hours in a year
38 x 52 = 1976 hrs
A x B - (C + D) = H
D
(Total chargeable
(Sick leave and misc) hours) =
(40 days x 8 hrs) = 1976 hrs - (240 hrs +
320 hrs
320 hrs) =
1416 hrs
E+F
F
(Annual total
(What annual profit
turnover needed)
would you like to
($32,000 + $35,000)
earn?)
=
$35,000
$67,000 turnover
(E + F) ÷ H
(Total turnover) ÷ (
H
Total chargeable
(Total chargeable
hours)
hours)
($67,000 ÷ 1416 hrs)
1416 hrs
=
$47.31 per hour
Related links
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Your pricing must be fair, accurate and displayed correctly. Learn about pricing guidelines
on the Office of Fair Trading website.
The Australian Consumer Law applies under the Competition and Consumer Act 2010 to
protect consumers and ensure fair trading across Australia. Avoiding unfair business
practices helps you to understand your responsibilities under the law.
Learn about quoting for products and services.
Pricing Strategies
Reviewing, changing and advertising prices
Your costs, competitors' prices and the demands of your target market may change over time. It is
crucial that you review your prices on a regular basis so you have up-to-date information and you
can make any pricing changes that are needed.
Review your prices regularly
Set up a formal review schedule (i.e. on a monthly, quarterly or 6-monthly basis) to help you keep
on top of your cash flow and your pricing strategy. Key events that should prompt a review of your
prices include when:
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a product or service is not selling
you start to sell a new product or service
your costs change
your competitors decrease or increase their prices
your competitors introduce a new product or service
there are changes to your industry or the Queensland, Australian or international
economies.
Change your prices with care
When changing your prices you must explain to your customers how this change benefits them. You
need to tell customers how the new price gives them more value for money.
It is easier to lower the price you charge if you have lowered your costs. However, be wary of
changing the quality or specifications of a product or service just so you can decrease the price.
These changes may not appeal to your customers, even at a lower price.
If you increase your prices then your customers will want to know what extra value they will
receive. Many customers are price-driven. In a competitive market, it is important to clearly explain
the additional features, new benefits or improved service that customers will enjoy as a result of
the price increase.
You may have increased your prices because your costs have risen. In this case, your customers
may not want to pay more for the same product or service, and they may go to one of your
competitors. To avoid this, you should promote the benefits of staying with your business. You
could promote your high levels of customer service, use loyalty discounts, or offer a discount
voucher for their next purchase.
Pricing Strategies
Make it easy for customers to see your new prices by changing all of your advertising material at
the same time. Your website, newspaper or magazine advertisements, catalogues, shopfront
posters and price stickers must always display your current prices.
Advertising
Many businesses advertise their prices but some do not. If your pricing is competitive it can be an
advantage to advertise your prices as this will encourage customers to buy from you.
This strategy can attract customers, but it also makes it easier for them to compare prices. Savvy
customers may use your advertisements to negotiate a discount or a price-match from one of your
competitors.
Customers usually expect to find a great deal of information on your website, and many will visit
your website to research your business before they make contact with you. Make sure that all
product and pricing information on your website is up to date. Find out how to create a website.
Price-fixing laws and advertising regulations
When setting your prices and advertising your products and services, you must comply with the
law.
Price-fixing laws
Price fixing is an agreement - whether it is a casual conversation or a formal understanding between competitors to set agreed prices for products and services. It is illegal under the
Competition and Consumer Act 2010. The Act replaced the Trade Practices Act 1974 on 1 January
2011.
The Australian Competition and Consumer Commission (ACCC) administers the Act. Price fixing is a
complex area and significant penalties apply, so ask your solicitor to explain your obligations under
the Act. You must understand how the Competition and Consumer Act 2010 applies to your business.
Advertising regulations
It is illegal to mislead the public when you advertise products and services. You cannot rely on
small print and disclaimers as an excuse for misleading or deceptive conduct.
If your advertising creates a misleading overall impression among its audience about (for example)
the price, value or quality of products and services, it is likely to break the law. The Office of Fair
Pricing Strategies
Trading (OFT) provides information on pricing guidelines to ensure that your pricing is not
misleading.
OFT has a range of enforcement options available when they consider a business to be breaking the
law. You must understand your obligations and how you can avoid unfair business practices.
Learn more about advertising regulations.
Related links
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The Australian Consumer Law applies under the Competition and Consumer Act 2010 to
protect consumers and ensure fair trading across Australia. The avoiding unfair business
practices guide helps you to understand your responsibilities under the law.