Setting the right price for your product or service

Key points

• Learn how to price your product or service based on market and production costs.
• Explore some pricing strategies for your business.
• What to consider when increasing your prices.

A well-thought-out pricing strategy is crucial for the success of your business. When you're just starting out, determining the right price for your products or services can be challenging. It's important to consider several factors to ensure your costs are covered while making your offer appealing to potential customers.

How to price a product or service

Before you settle on a price for your product or service, it’s important to factor in how much it costs to make your product or deliver the service. This will reduce the risk of operating at a loss – where the cost of making the product or delivering the service is more than the income it generates.

It’s helpful to research your competitors and review their pricing. This will give you an indication of how much services or products in your industry typically cost, and what people are willing to pay.

Remember to factor in all the hours you spend running the business, including administrative tasks, marketing and customer service. Small business owners often undervalue the time they put in, and your pricing should reflect the full scope of your efforts.

Another thing to consider is your pricing objectives, which are goals you want to achieve through your pricing. For example, you might want to use your pricing to increase demand for a specific product or service. Or, you might want to get ahead of your competition.

Hot tip: Don’t forget about the goods and services tax (GST) which is a tax of 10% applied to most goods and services sold in Australia. If your business earns more than the GST threshold, you will need to register for GST. Once you’re registered, GST should be included in the price of the goods and services you sell.

Different types of pricing strategies

There are many pricing strategies you can reference to price your products or services. If you’re unsure about how much is too much (or too little) to charge, check with your accountant. They can help you set up the right pricing strategy for your business.

1. Full-cost pricing

• What it is: Full-cost pricing involves calculating the costs that go into making the product or delivering the service before adding a markup. This helps you cover your costs and make a profit.
• What to consider: To determine the full cost of your product or service, you need to factor in your fixed and variable costs. Fixed costs won’t change based on the volume of stock you purchase or the amount you sell. Variable costs fluctuate based on the price of raw materials or labour, as well as the quantity you are producing.
• Benefits: With this strategy, your business can cover its costs and earn a profit. Full-cost pricing makes it easy to justify your prices.
• Drawbacks: It can be harder to scale in response to changing economic conditions and competition. For example, you may need to change strategy when a competitor enters the market with lower prices or innovative products, or when there are changes in raw material costs.
• Who this pricing strategy right for: Industries such as food and beverage, e-commerce, retail and consulting services.

2. Price skimming

• What it is: Price skimming involves setting a high price for your product then gradually reducing it over time. This strategy can be effective if you’re introducing an innovative product or service your competitors don’t have.
• What to consider: Price skimming only works effectively when your market isn’t crowded (unless you’re a big brand releasing a shiny new product).
• Benefits: You can sell at a high price point and potentially make a profit early in the life of your business while demand is high.
• Drawbacks: You might lose customers down the track as they realise they bought your product at a higher price early on.
• Who this pricing strategy right for: Businesses with a unique and innovative product that flies off the shelves upon release. For example, if you’re a bakery that’s created a unique new pastry that went viral on social media, you can charge a premium while it’s popular, then reduce the price when interest wanes.

3. Penetration pricing

• What it is: Penetration pricing is the opposite of price skimming. You’re essentially selling a new product or service at a low price to get customers’ attention (and entice them away from the competition).
• What to consider: This pricing strategy can help encourage people to try your business. To see the full effects of this strategy, you need to be patient and play the long game.
• Benefits: By offering your products or services at a very low price, you will encourage people to try your business. Once you have built a substantial member base, and demonstrated the value of your services, you can gradually increase prices.
• Drawbacks: It can impact short-term cash flow. If you’re offering very cheap products and services, there will be minimal income coming in.
• Who this pricing strategy right for: This could be the way to go if you’re opening a new business that relies on subscriptions or regular payments, such as a gym or online subscription service.

4. Bundle pricing

• What is it: Bundle pricing involves offering two or more products or services as a package deal, which you price at a discounted rate.
• What to consider: It can simplify the buying journey, because your customer is getting what they need in one package rather than trying to find individual products on your website.
• Benefits: You can give meaningful value to your customers and drive an increase in your overall sales because customers know they’re getting a good deal. Bundles can also be a good foundation for a marketing campaign.
• Drawbacks: It might lower profits for a specific item or service.
• Who this pricing strategy right for: Online retailers.

5. Dynamic pricing

• What it is: Dynamic pricing involves pricing your product or service in line with external conditions such as the current market, demand for the product or service, your industry, the season and even competitor pricing.
• What to consider: You’ll need to stay on top of what’s happening around you and how it affects your business. The moment one of your conditions changes, you’ll need to update your price. When the conditions change again, so will your pricing.
• Benefits: This strategy gives you more control over your prices as you’re committed to staying on top of external conditions as and when they change.
• Drawbacks: It can be labour-intensive to keep your finger on the pulse and update accordingly.
• Who this pricing strategy right for: Businesses that are influenced by external factors, such as grocery stores, ride-sharing apps, hotels and car rental services.

6. Freemium pricing

• What it is: The freemium pricing strategy involves enticing customers to use a basic version of your product or service for free while charging a premium price for the full offering.
• What to consider: It’s important to clearly communicate the offering and inclusions to your customers so they know what they’re signing up for. This strategy works best if the most exciting or innovative elements are only available as part of the paid product. That will entice people to get out their wallets.
• Benefits: It’s a great way to test your product or service while growing your customer base.
• Drawbacks: It can be hard for you to break even or make a profit.
• Who this pricing strategy right for: Online services with a subscription-based model, such as software start-ups or apps.

7. Pay what you want

• What is it: The pay-what-you-want strategy invites the customer to, as the name suggests, pay as much or as little as they want for a product or service.
• What to consider: It’s a good tactic to show off new promotions and get customers hooked, with the hopes they’ll pay more in the future.
• Benefits: You can learn a lot about your customer’s purchasing behaviours, which can help you come up with future deals and prices for your product or service.
• Drawbacks: The strategy takes a lot of thought and planning as you’ll need an incentive to get customers to pay a reasonable amount and come back for more.
• Who this pricing strategy right for: Charities and creative businesses, such as musicians and artists.

What happens if you need to raise your prices?

Whether it’s your production and material costs increasing, or growth in your business that requires more staff, price increases are an inevitable part of running a business.

If you’re considering a price rise, look at what your competitors are doing. If they’re bumping up their prices, it’s a sign that you might be able to as well.

If your business has been around for a while, it’s important to let your customers know about any price increases before they happen. If you explain why you’re doing it, most customers will understand. However, if your business is relatively new and you don’t have many existing or repeat customers, you can likely go ahead and change your prices. In any event, it’s always in your best interests to keep customers in the loop as much as possible.

Next steps

Download our profit and loss template to help you see how your pricing will affect your business’ finances.