Pricing products and services

To make good pricing decisions, you need to know and understand your existing business costs.

Your prices need to compare well to those of other businesses. Make sure you can answer these questions:

• How do your competitors price their products and services?
• Is the market very competitive? Is there limited supply?
• What value do customers place on the benefits you deliver?

You can find information about competitors by:

• looking at prices online
• reading marketing flyers
• making a phone enquiry.

You can also:

• read more about doing a competitive analysis as one of the steps in developing your marketing strategy
• complete the competitor profile chart, which includes a section on pricing
• learn how to research your competitors and your industry.

Once you have the information you need, decide if you need to make changes:

• If your price is much higher than your competitors', is it obvious to customers that you offer extra value, or will you lose sales?
• If your price is much lower, are you underselling the benefits you offer and risking not making enough profit?

To appeal to your ideal customers, you need to know how much they're willing to pay for your products.

If you're not clear on who your target customers are:

• read more about defining your target segments
• complete a customer profile chart (you may have already completed this as part of your marketing strategy).

Be clear about your customer value proposition and take that into consideration. This will help you find the best pricing strategy and specific price points.

• If your target customers believe the price is too high, they may shop around and buy elsewhere.
• If they believe the price is too low, they may question your quality and find a product they believe to be better quality.

Cost-plus pricing

• Typically used by businesses who sell physical products.
• Adds a mark-up or margin to the cost of producing the product, taking all fixed and variable business costs into consideration.
• You will need to know the variable costs for each unit sold (cost of goods sold) and also be able to allocate a portion of your fixed costs to each unit sold.
• Based on being competitive while making the required profit.

Mark-up pricing

• Similar to cost-plus pricing but takes the cost of goods sold per unit and adds the same percentage mark-up to all items (e.g. 50%).
• You can:
  • use just the cost of goods sold (as in our calculator example below)
  • or
  • also allocate a portion of your fixed costs to each unit to have a total cost of production for each unit.
• Talk to your suppliers, competitors or relevant business and industry 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.

Hourly pricing

• Commonly used by service-based businesses and contractors.
• An hourly rate considers business costs and available time, unlike project-based pricing, which is a flat fee based on a project scope.
• Based on exchanging time for money.

Skimming pricing

• Often used by new businesses or to launch new products (e.g. technology).
• The initial price is aimed at customers who are willing to pay more to access a product early.
• The price is later reduced to appeal to the broader market.
• Based on there being a greater demand for a product than what is available.

Penetration pricing

• Often used by new businesses who want to gain market share.
• Uses a lower price to generate more sales.
• There needs to be a substantial target market for the offering.
• Typically a short-term strategy due to low profit margin.

Loss-leader pricing

• A proven promotional strategy used by retailers.
• Uses a heavily discounted item, even priced at a loss, to entice customers to visit and buy other products.

Premium pricing

• A form of psychological pricing often used for luxury goods.
• Price is set higher than the rest of the market to create exclusivity.
• The prestige or image outweighs the actual price for the item.
• Customers are prepared to pay more for perceived benefits.

Competitive pricing

• Commonly used by businesses in industries where there are many competitors.
• Price is set relative to that of competitors, taking business costs and profit targets into account.
• Enables the business to stay competitive over the long term.

Economy pricing

• Frequently used for products and services where price is very important.
• The budget end where customers will trade off quality for price.
• Relies on having lower production costs than competitors.
• Sales must be high to maintain profit levels.

Dynamic pricing

• Often used where prices regularly fluctuate (e.g. hotels).
• A very flexible way to match price with demand.
• Could be based on factors such as seasonality and supply.

The pricing approach for your business will be influenced by the demand for your products and services. This demand may be elastic or inelastic:

• If the demand is elastic, a price change will have a significant effect on demand (e.g. after a price rise, customers may decide not to buy).
• If the demand is inelastic, a price change may have limited effect on demand (e.g. a lower price does not persuade customers to buy).

Customer sensitivity to price changes depends on many factors, for example, if:

• the product is a necessity or a luxury (e.g. essential medication versus fine dining)
• there are substitutes available (e.g. buying potatoes if the price of rice increased).

Carefully consider how price changes might affect the demand for your products and services.

How your customers pay for products and services plays a part in pricing decisions. With a growing range of payment options, it's important to find what works best for your business.

This is an opportunity to add value by making life easier for customers.

Ask yourself these questions:

• What payment methods do you currently accept?
• Which payment methods do you think your customers prefer?
• What are the costs and risks associated with each payment method?

For example, you may:

• run an online business with a subscription model and recurring credit- or debit-card payments
• be a fashion retailer who has added buy now, pay later options to meet consumer demand.