What pricing concept is used if all costs are considered and a fair markup is added to determine the selling price?

To maximise profits and achieve growth, you need to determine the right price for your products and services. Setting the right price will ensure that your customers are satisfied and that your business stays profitable.

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Role of pricing

If you get your pricing strategy right from the start, you're more likely to attract and keep customers and make a profit. Setting the wrong price can cause serious financial problems for your business.

• If you charge too much, you may price yourself out of the market.
• If you charge too little, you may not be able to cover your costs.

Talking about money with customers may feel uncomfortable, but your pricing decisions should be guided by your business plan and your marketing strategy. Also remind yourself:

• you're in business to earn a living and make a profit
• your customers will appreciate the value you provide
• it's much easier to lower prices than to raise them.

Tip: Remember the 7Ps of marketing

Keep your marketing mix in mind when you make pricing decisions. The combination of elements must work together.

Research your pricing

Good research will make you feel confident about pricing the products, services and experiences you offer. There are 3 aspects you need to investigate.

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.

Determine your pricing

Understanding different pricing strategies will help you choose the right approach for your business. This will depend on your business type and main goals (e.g. maximise profits, grow market share, reduce inventory levels, increase immediate cash flow).

Value of the right pricing strategy

The right pricing strategy for your business should:

• demonstrate your business value
• persuade your customers to act
• achieve your financial objectives
• reinforce your brand positioning.

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.

Find out more about how to set up online payment options for your business.

Pricing calculators

Use our calculators to help you work out your prices.

1. Read the instructions and examples.
2. Type the numbers that are relevant to your business into the calculators.
3. Decide if this pricing will work for your business.

• Take your actual business cost and apply a percentage mark-up to your items (e.g. 50%).
• Adjust the mark-up based on your strategy (e.g. use a lower mark-up for penetration pricing).
• This is useful for multiple offers at different prices – where other methods are too complex.

Talk to business advisers and industry associations to find out if there's a mark-up standard.

Calculate mark-up price

$$\text{Mark-up price} = \text{Cost of goods sold} + (\text{Cost of goods sold} \times \text{Mark-up %})$$

• Work out your fixed overheads and add this to the cost of sales (the variable cost to sell each item).
• Add the amount you'd like to make from each sale (your desired profit).
• While this can be time consuming, it's the best method to ensure you are maximising your profit.

For this method, you must have accurate and up-to-date records of your business costs.

Calculate cost-plus price

$$\text{Cost-plus price} = \text{Fixed overheads} + \text{Cost of goods sold} + \text{Desired profit}$$

• This approach is useful when you're delivering a service rather than a product—particularly if you're a sole trader.
• It's easy to overestimate the available working days and hours per day. Remember to include all your leave.

Find how to calculate the break-even point for your business.

Calculate hourly rate

This calculator assumes there is just 1 person in the business.

$$$$

Pricing reviews

Whether scheduled or in response to a specific change, a pricing review will enable you to make decisions based on accurate and current information.

Schedule reviews

Consider scheduling formal price reviews (e.g. on a monthly, quarterly or half-yearly basis) to accommodate changes in, for example:

• the cost of running your business
• expectations of your customers
• new and existing competitors.

Respond to changes

You may need to review and adjust your pricing when there are changes:

• in your business (e.g. launching a new product)
• from your competitors (e.g. lowered prices)
• in the market (e.g. economic conditions).

Stay informed about what's happening in your market, as this will affect your pricing.

Keep customers informed

If you change your prices, make sure this is updated wherever your prices appear. Ensure you communicate the changes clearly to customers.

Keep a checklist of where prices are published, for example:

• sales kits
• price lists
• brochures
• websites.

Many customers will visit your website before making any direct contact with your business, so make sure it's up to date.

If you don't have an online presence, find out how to create a business website.

Pricing laws and regulations

When setting your price and advertising your products and services, you must comply with the relevant laws and regulations. Here are a few to consider.

Price-fixing laws

Price fixing is when 2 or more competitors (either formally or informally) agree on setting a price.

Price fixing is illegal in Australia under the Competition and Consumer Act 2010. This is a complex area with significant penalties, so make sure to:

• understand how this Act directly applies to your business
• ask your legal adviser to explain your obligations under this Act.

Predatory pricing

Predatory pricing takes place when a business with significant market share intentionally reduces prices to damage or eliminate smaller competitors.

This is deemed to be anti-competitive behaviour, so reports can be made to the Australian Competition and Consumer Commission (ACCC).

Advertising regulations

It's illegal to mislead the public when advertising your products and services.

If your advertising creates a misleading overall impression, it's likely to break the law. This could be about the price, value or quality. You can not rely on small print and disclaimers as an excuse for deceptive conduct.

Important resources

Your pricing must be fair, accurate and displayed correctly. The following sources and resources will help to ensure your pricing is not misleading:

• Australian Competition and Consumer Commission (ACCC)
• Australian Consumer Law (ACL)
• Office of Fair Trading (OFT)

Always refer to these websites when setting or advertising your prices.

• Last reviewed: 29 Aug 2022
• Last updated: 29 Aug 2022

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