Select pricing strategies
There are a number of pricing strategies you can employ when setting your price, including strategies based on costs, competition, perceived value or the product itself. It's important to establish your pricing objectives early to help you make your choice of strategy a little easier. When choosing your pricing strategies, it's also important to keep your overall marketing strategies in mind to ensure your strategies complement one another.
Cost-based pricing strategies
There are a number of cost-based pricing strategies you can employ when setting your prices including:
This is when the price is arrived at by adding a small margin or mark up to the costs of producing and distributing the product or service. Care should be taken when calculating your price to ensure that all relevant costs such as cost of goods sold, fixed costs including Goods and Services Tax (GST) and other taxes are factored in. If your calculations are accurate this strategy can keep your price competitive while ensuring that you still make a profit.
For information on financial definitions, see our Glossary of financial terms.
This strategy is not suited to all products or services. In some circumstances factoring in all relevant costs can effectively price you out of the market. In those circumstances, you can try and adjust distribution costs, reduce input costs, increase the value of the product, introduce additional features or services or find other ways to keep the costs down. This strategy first determines a target price based on the current price of the product/service in the market. Then a desired profit is taken off the target selling price to arrive at a cost price.
The business then works out a way of producing that product/service for the cost price by reducing expenses.
Charge per hour method
Often used by service-based business and independent contractors, the 'per hour' method calculates all the relevant costs of a business at an hourly rate. When using this method it's important to factor in all your business costs and not overlook taxes, a wage for yourself, superannuation and leave entitlements.
Competition-based pricing strategies
There are a number of competition-based pricing strategies you can employ when setting your prices.
Going rate pricing
This can be useful in situations where there is a clear price leader in the market. Going rate pricing involves adjusting prices to be near or at the same price as the price leader. This can be a safer approach for small businesses, as they can often find it difficult to compete on price with a dominant competitor without entering into a price war, which eats away at profits.
Value-based pricing strategies
There are a number of value-based pricing strategies you can employ when setting your prices including:
This strategy is based on what customers think a product or service is worth, rather than actual costs. The value is determined through market testing and a price is set based on this value. For example, a customer may value a product or service much more if it saves them a lot of time. The price can then be set to reflect this saving.
This pricing strategy is commonly used with prestige, luxury or exclusive products or services. The high-end price reflects the high value placed on the product or service. Typically, customers have higher expectations in quality, performance and or service for high-end products.
Product-based pricing strategies
There are a number of product-based pricing strategies you can employ when setting your prices.
This is when an initial low price is set on a new product or service, in order to gain high sales and or market share. Once this point is reached, the prices are increased to normal pricing levels.
Skimming pricing is when a high initial price is set on a new product or service. This strategy is designed for products or services that are in high demand and are valued much more highly (such as prestige or exclusive products or services). This pricing strategy is also useful for products that required high upfront research and development costs. Once the required profits are made, the price is then lowered for a wider market.
Loss leader pricing
Loss leader pricing is where one product or service is offered at below cost. The objective with this strategy is to attract customers with the low price, with the hopes that they also purchase other products or services with a higher profit margin.
What to do...
- Visit our Develop a marketing strategy page if you don't already have an overall marketing strategy.
- Go to our Events search for seminars on marketing and pricing near you.
- Use our free Advisory Services search to find a low-cost business adviser near you.
- Consult an experienced business adviser, accountant or solicitor.
- Check out our Glossary of financial terms for information on financial definitions.