What is a pricing strategy?
Having a pricing strategy is an important part of a marketing plan for your business. A pricing strategy is the approach you take to price your products or services. The goal of your strategy is to:
- maximise your sales and profits,
- outperform your competitors, and
- satisfy your customers.
Common pricing strategies
Businesses usually set their prices based on the following strategies:
- the cost to provide your goods or service(plus a percentage)
- what the customer is prepared to pay
- the demand for your product
- what your competition charges.
Most businesses use a combination of all of these strategies when setting prices.
It’s important to review your prices about once every 3 months. This will ensure your prices continue to meet your needs and the needs of your customers.
1. Cost to provide your product or service
When setting a price, you need to consider all the costs involved. These include your total overheads, sales and marketing expenses, and costs to deliver your product and service.
Some examples of costs:
- EFTPOS terminal fees
- credit card fees
Some costs will increase over time, such as insurance, superannuation payments and electricity. Factor in these increases when calculating your total costs.
2. How much the customer will pay
It’s important to know what customers will pay for your product or service. If it’s more expensive than customers are prepared to pay, they’re unlikely to buy from you.
Customers might also place high value on something that’s quite cheap for you to make or deliver. In this case, you could raise your price to make more profit.
Are you aiming for customers who are looking for a cheap product, or customers willing to pay more for quality? Doing market research can help you find out what your customers are prepared to pay.
Think about GST
If your business earns over $75,000, you must charge GST.
If you start selling a product without charging GST, then add 10% for GST at a later time, this may feel like a 10% price increase to your customers. So, it might be worth charging GST from the beginning, even if you’re not sure whether you’ll reach $75,000 in your business.
Be careful – if you don’t specify that your price is ‘plus GST’, its assumed that it’s included in the price.
3. Demand for your product and ‘price skimming.’
A business owner may sell at product at a high price when demand is high, and gradually lower the price over time to attract new customers.
This strategy, called ‘Price skimming’, is often seen with technology. If a new mobile phone comes out, customers may pay top price to own the product first. 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. In the travel industry, air tickets are more expensive during holiday periods and cheaper at low-demand times.
4. How much your competitors charge
It’s important to understand what your competitors are charging, and if possible, the reasons for their price. But don’t adjust your prices to be the same as your competitors unless you have a good reason. They may not have got their own pricing right!
Advertise your price differences
There may be price differences between your business and competitors. If you’re confident about your pricing, you could communicate to customers the reason for the difference. Promote any added benefits you or your product offer.
- Maybe your product is made from better-quality materials.
- Using your product may help your customers to save costs.
- Maybe your business uses sustainable and ethical practices that rival businesses don’t use.
- Perhaps you offer after-sales service as part of your service offering.
- Maybe you have a greater level of experience than your competitors.
Encourage customers to choose your business first because your product is better.
- This learning resource is adapted from the Business Victoria guide, Develop a Pricing Strategy.
- For help figuring out how many sales you need to make before you make a profit, see the Business Victoria guide, Calculate Your Breakeven Point, Margin and Markup.
- 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.