Your overall pricing strategy will depend on what type of demand there is for your product or service. Understanding different pricing strategies will help you to decide which strategy – or combination of strategies – is most effective for your business.
Factors affecting demand
The demand for your products or services may be elastic or inelastic:
- If the demand is elastic, a change in pricing has a significant effect on the demand (i.e. after a price rise customers may choose not to buy the product).
- If the demand is inelastic, a price change has little effect on demand (i.e. customers will still buy the item, regardless of the price).
Elasticity is dependent on a number of factors, including:
- Is the product a necessity or a luxury (medications vs. fine dining)?
- Are there any substitutes available (for example, if rice is not available, customers could buy potatoes instead)?
- Are there any complementary products (when the price of one product goes down, demand for another product goes up (i.e. razors and shaving cream)?
Common pricing strategies
Cost based pricing
- A strategy that adds a small mark-up or margin to the cost of producing your offer.
- Ensure that when you costing, you factor in all variable and fixed costs.
Charge per hour
- Commonly used by service-based businesses and contractors.
- The per hour cost factors in all business costs including wages and overheads.
- Often used for new products and services, especially technology where the product is deemed rare and high quality.
- The initial price is set high and attracts 'early-adopters' who want the product or service now and are willing to pay.
- When this group has been satisfied, the price is reduced to appeal to more price-sensitive customers.
- Aims for high sales through a lower price.
- Often used for products, services or experiences that would not attract an elite market.
- Discourages competitors because of the low profit margin.
- A large target market and a high volume of sales are needed to meet profit goals.
Image (or premium) pricing
- The perceived image is more important to a customer than the actual price (e.g. a luxury car that sells for as much as a house).
- Marketing should target the high end of the market and communicate the luxury on offer.
- Customers are willing to pay top dollar because of the value they place on the product.
- Aimed at the budget end of the market where customers are willing to forgo some quality or service for a lower price.
- Discounting is a difficult strategy to use long-term – sales volumes must be consistently high to maintain good profit levels.
- A product or service sold at a low price where you make little profit, or in some cases, a loss.
- This heavily discounted item should entice new customers to visit your business.
- While they buy the loss leader, they may also purchase other products or services with a higher profit margin (e.g. accessories, supplementary items, impulse buys).
Often businesses will employ flexible pricing models to better meet business and consumer needs. This may mean adding value to your offer, using dynamic pricing based on seasonal demand, providing bulk purchase discounts, loyalty discounts or through negotiation with key customers.
If you sell to multiple markets (e.g. you export to different countries), different pricing can be used. However, remember that if you sell via the internet, customers will be able to buy at your online price wherever they are (provided you ship to their area).
Learn more about the advantages of selling online.
- Learn more about pricing guidelines to ensure your pricing is fair, accurate and displayed correctly.
- Read the avoiding unfair business practices guide to understand your responsibilities under the law. The Australian Consumer Law applies under the Competition and Consumer Act 2010 to protect consumers and ensure fair trading across Australia.
- Find out more about after-sales service.
- Read about monitoring your financial performance.