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- Price your product or service
There are three ways that businesses usually approach price setting:
- the cost of goods plus a percentage
- what the customer is prepared to pay
- competitor pricing.
Businesses tend to choose one method but to be effective price setting needs to include all three approaches and be reviewed regularly (about once every three months).
How to set your prices
Pricing of products and services needs to take into consideration a whole range of factors including:
1. How much does it cost you to provide your product and service?
This includes costs of your product and service delivery as well as your total overheads, sales and marketing expenses. This can mean a whole range of things like EFTPOS terminal fees, packaging, credit card fees, payment gateway charges, showroom or storage costs. Don't forget to factor in rising costs such as increasing superannuation payments and electricity.
For help on setting your break-even point (how many sales have to be made before you start making a profit) visit our Calculate your breakeven point, margin and markup page.
If you're a service business the Queensland Government has a useful calculator to determine a realistic hourly rate.
2. How much is the customer prepared to pay?
It’s important to know what customers think they should be paying for your product or service. Customers may see extraordinary value from something that isn’t expensive to make or deliver. To set your price to cover costs in this instance may be robbing you of profits. Deciding whether your price will attract bargain hunters or people looking for quality is part of your marketing strategy and is important to consider.
However, don't forget if your product or service is more expensive to provide than customers are prepared to pay, there is a problem. Market research can help you find out what your customers are prepared to pay.
3. What is the demand and lifecycle of your product?
How long can you sell your products or services at the premium price? For example, leading up to Easter, shops can charge a premium price for Easter eggs but as soon as Easter has finished the demand is low and then the prices drop. For those in the tourism industry there are clear peak times and off peak times which result in different rates. Does this apply to your industry?
If it’s a new product like new technology customers will often pay top dollar to be one of the first to own the product but as soon as it’s not considered new, the price will need to drop to attract customers. This practice is also known as 'price skimming' where businesses maximise their profits by charging a higher price when demand is high and gradually lowering the price over time. This is a particularly important strategy for products perceived as rare or high quality.
4. Are you charging GST?
It's compulsory to charge GST for all businesses earning over $75,000. This can sometimes feel like a 10% price hike to customers if you suddenly start charging it so it can be worth charging GST from the beginning, even if you're not sure whether you'll reach the threshold.
Watch out! If you don't put "plus GST" then the price quoted assumes it includes GST.
5. How much do your competitors charge?
It's important to understand what your competitors are charging and if possible the reasons for their price. The small business expected income benchmarks on the ATO website will help you get a feel for what others are charging.
If there is a difference in price it is important to be able to communicate to customers the reason for the difference such as quality, cost savings, after sales service and experience. Never assume your competition has got their pricing right.
To help you with this process use our Marketing plan template.
Case Study: Advice on pricing strategies
'Good research and a good plan helps you make sure your pricing strategy lines up with your target market.Shelly Collins, Galerie Montmartre
Read more Advice on pricing strategies