Price It Right: The Best Pricing Strategy for Your Small Business
Written by Bindi Gethen
You know what’s exhausting? Trying to compete on price as a small business owner. Big corporations drop their prices with the casual flick of a wrist, while you’re sitting there, late at night, calculator in hand, trying to figure out how to keep up without throwing your entire business down the drain. Frustrating doesn’t even begin to cover it.
But here’s the thing: Competing on price is a race to the bottom. It’s a mud fight that nobody really wins. You’re not going to out-discount a multinational corporation. But you can out-think them. You can out-care them. You can out-value them.
So which pricing strategy is best for small business owners? Cost-plus pricing is often appealing to small business owners due to its simplicity, predictable margins, and ability to cover costs. It’s the simplest pricing strategy there is. However, it may not consider market demand or competition, potentially leading to overpricing or underpricing. It’s suitable for some businesses but not all, depending on various industry factors and personal preference.
Which pricing strategy is best for small business?
Cost-plus pricing might not always be the “best” strategy for all small business owners, but it has certain advantages that can make it appealing, particularly for those who are starting or running businesses in a field with relatively stable costs and competition. Here’s why:
Simplicity
Cost-plus pricing is easy to understand and implement. You calculate your total costs for producing a product, add a markup (a percentage of the cost), and that’s your selling price. No complex algorithms or market analyses needed.
Predictable margins
Rest assured that you’ll make a certain percentage of profit on each sale. This can be helpful in budgeting and planning since you know exactly how much you’ll make if you sell a specific quantity.
Covering costs
For a small business, one of the biggest fears is losing money. By pricing at cost plus a certain percentage, you can be sure that the costs of goods sold (COGS) are covered. It reduces the risk of setting a price too low and losing money on sales.
Keep in mind that you shouldn’t be choosing a cost-plus pricing strategy because of the misconception that it’s a one-size-fits-all solution. Cost-plus pricing has its downsides. For one, it doesn’t take into account the demand, competition, or perceived value of a product. If competitors are selling similar products at a lower price, customers may choose them over yours, regardless of your costs. You may end up pricing yourself out of the market.
The cost-plus pricing model is not suitable for all niches and products. In highly competitive or rapidly changing industries, this pricing strategy may be too rigid and not adaptive enough to changing market conditions.
Pro tip
Consult finance and marketing professionals to find the pricing strategy that is the best fit for your unique brand.
7 different pricing strategies for small businesses
For small business owners, you can experiment with cost-plus, penetration, discount, psychological, freemium, skimming, and dynamic pricing strategies. The best approach will depend on the specific situation, product, market conditions, and goals of your business. Often, a combination or hybrid of these strategies might be employed to achieve the desired outcome.
1. Cost-plus pricing
This is like the classic jeans-and-a-tee strategy. No frills, just logic. Add up the cost of production, slap a margin on top, and there’s your price. It’s straightforward but it doesn’t take demand or competition into account – meaning it might not always be the optimal approach.
2. Penetration pricing
Start low and grab attention. Aiming to quickly capture market share, businesses using penetration pricing will set a lower initial price to attract customers. Over time, as customer loyalty builds, prices may gradually increase. While it’s great for gaining a foothold, it may initially lead to reduced profits.
3. Discount pricing
Sales, offers, and promotions. Everyone loves a good bargain. But don’t overdo it. Otherwise, you’ll look like you’re at a never-ending clearance sale. This strategy may also lead to a dependency on constant sales promotions.
4. Psychological pricing
Pricing at $9.99 instead of $10 can make a big difference in perception. A psychological pricing model leverages the customer’s emotional response to certain price points. It’s subtle but can be a powerful tool in encouraging purchases.
5. Freemium pricing
Offering a free version with the option to pay for additional features (the “premium” part of “freemium”) can be a brilliant way to attract users and let them see the value of what you offer. If they like what they see, they might just buy in.
6. Skimming pricing
Starting with a high price and then gradually lowering it allows a company to “skim” different segments of the market. Early adopters and enthusiasts may be willing to pay more, while others will wait for the price to come down. It can maximise profits but must be handled with care to avoid alienating potential customers.
7. Dynamic pricing
Ever-changing, like the seasons of fashion. Prices fluctuate based on demand, inventory, competitor’s prices, or even the weather.
The dynamic pricing strategy uses algorithms and market data to constantly adjust prices based on a confluence of factors. It’s common in industries like airlines and hospitality, where prices can change in real time. It can maximise profits but requires sophisticated technology and can sometimes lead to customer frustration.
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How Are Small Businesses Taxed in Australia? 2023 Guide
Pro tip
Competing on price is a battle that's almost impossible to win, especially against larger competitors with deeper pockets. It can lead to a frustrating and endless cycle that devalues your products and services.
Let’s brainstorm a pricing strategy that grows your small business
The bottom line: Price wars are for the unimaginative. You’re more creative than that. Let’s think strategy – let’s think growth – let’s think about how your small business can become the big fish in its pond.
That’s where The Bookkeeping Studio comes in. We know exactly how you feel. That’s why our own bookkeeping packages were priced in a way that fits your business like a glove. For the Aussie business owners, forget the price wars. Let’s nail down a pricing strategy that reflects the real value you provide.
Hey, my name’s Bindi Gethen! I’m the founder of The Bookkeeping Studio in Australia. With over 15 years of experience in the industry, I have a deep understanding of the challenges that small and medium-sized business owners face when it comes to managing their finances.
I am passionate about empowering my clients with the financial information they need to succeed. My team and I pride ourselves on our commitment to exceptional value, accuracy, and confidentiality. Our virtual bookkeeping services include payroll, budgets, and management reporting, among others.
Not to toot our own horn, but we can assure you that you won’t find a bookkeeping partner like us anywhere else in the Southern Highlands.
