What is a pricing strategy?
A pricing strategy is the approach your business takes to price your products or services. The goal of your pricing strategy is to maximise sales and profits, outperform competitors and best serve your customers.
Common pricing strategies
Businesses usually set their prices based on the following pricing strategies:
- the cost to provide your goods or service plus a percentage
- what the customer is prepared to pay
- the demand and life of your product
- what your competition charges
To be most effective, you should consider a combination of all of them when setting your prices.
It's also important to review your prices about once every 3 months to ensure they still meet your needs and the needs of your customer.
Cost to provide your product or service
The cost of providing your product or service includes your product and service delivery, your total overheads and sales and marketing expenses.
This can cover a range of things like:
- EFTPOS terminal fees
- packaging
- credit card fees
- payment gateway charges
- showroom or storage costs
Don't forget to factor in costs that will increase over time, such as insurance, superannuation payments and electricity.
For help figuring out how many sales you need to make before you make a profit, visit our page on calculating your break-even point, margin and markup.
If you're a service business, Business Queensland has a useful calculator to determine a realistic hourly rate.
How much the customer will pay
It's important to know what customers think they should be paying for your product or service. Your product or service can't be more expensive to provide than customers are prepared to pay.
Customers might also place great value in something that's quite cheap for you to make or deliver. So in this instance if you set your prices to only cover costs, you could be robbing yourself of profits. Deciding whether your price will attract bargain hunters or people willing to pay for quality is part of your wider marketing strategy. Revisit your marketing plan if you need to.
Market research can help you find out what your customers are prepared to pay.
Are you charging GST?
It's compulsory to charge GST for all businesses that earn over $75,000. This can sometimes feel like a 10% price hike to customers if you suddenly start charging it. So it might be worth charging GST from the beginning even if you're not sure whether you'll reach the threshold.
Be careful – if you don't specify that your price is 'plus GST', the price assumes that it's included.
Demand and life cycle of your product
'Price skimming' is a strategy that involves charging a higher price at a time when demand is high and gradually lowering the price over time to attract new customers. This is an important strategy for products that are perceived as rare or high quality.
If it's a new product, such as new technology, customers will often pay top dollar to be one of the first to own the product. But the older the product gets, the more the price will drop.
Price skimming is also common in industries with peak and off-peak sales cycles, such as Easter eggs or travel and tourism.
How much your competitors charge
It's important to understand what your competitors are charging – and if possible the reasons for their price. But never assume your competition has got their pricing right.
The Australian Taxation Office (ATO) has an app to help you get a feel for what others are charging. Find out more about the Small business benchmarks app on the ATO website.
Advertise your differences
If there is a difference in price, it's important to communicate to customers the reason for the difference such as:
- quality
- cost savings
- sustainability and ethical practices
- after sales service
- experience
Aim to differentiate yourself from your competitors to encourage customers to choose your business first. Use our marketing plan guide and template to help you with this process.