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How to Choose the Best Pricing Model for Your Small Business

Balancing scale with vegetables on one side and stacks of coins on the other, symbolizing the cost of goods.

There are many ways to boost sales and promote business growth. But one of the most underrated is choosing the best pricing model for your small business.

One of the most daunting tasks you have as a small business owner is pricing your products or services. Set them too high, and you can miss out on valuable sales. Set them too low, and you can miss out on valuable revenue.

Thankfully, pricing doesn’t have to be a sacrifice or a shot in the dark.

There are loads of pricing models and strategies out there for you to consider. And some of them can really help you wrap your head around how to set the perfect prices for your specific audience and revenue goals.

In this article, we will explore six common pricing strategies you can consider to improve your sales.

Why Choosing the Right Pricing Model is Crucial

As a small business owner, choosing the right pricing model is crucial to your success. Pricing models determine how much you charge for your products or services, and they can have a significant impact on your bottom line.

A well-chosen pricing model can help you maximise profits, attract new customers, and retain existing ones. On the other hand, a poorly chosen pricing model can lead to lost sales and reduced profits. Worse, it can lead to the failure of your business.

The 6 Strategies

Strategy #1. Value-Based or Premium Pricing

With this model, you set high prices for high-quality products or services. Value-based pricing works well for businesses that offer unique or specialised products or services.

This pricing strategy requires a deep understanding of your target audience and their willingness to pay.

Value-based pricing is ideal for businesses that want to position themselves as premium brands. Think the likes of Apple and Tesla. Such businesses must also be willing to invest in marketing and branding efforts to support that position.

Strategy #2. Competitive Pricing

Here, you set prices based on your competitors’ prices. So, the competitive pricing model requires you to regularly monitor your competitors’ prices.

This pricing model works well for businesses in crowded markets with many competitors. Competitive pricing is ideal for businesses that want to position themselves as affordable options in a crowded market.

Businesses like Amazon or Walmart use competitive pricing to stay on top of their game.

Strategy #3. Cost-Plus Pricing

This is a pricing model that involves calculating all costs in both manufacturing the product and selling it, then adding a markup. So, cost-plus pricing works well for businesses with high overhead costs.

This pricing model requires a good understanding of your costs and a careful calculation of your markup. It’s ideal for businesses that want to ensure they are covering all their costs and making a profit on each sale.

A good example of a company that implements this is Starbucks. The company uses cost-plus pricing to determine the price of its coffee products, taking into account the cost of beans, labour, and other expenses.

Strategy #4. Penetration Pricing

With this model, you set low prices to gain market share. Penetration pricing works well for businesses entering a new market or launching a new product. As such, this pricing strategy requires careful planning to avoid long-term profitability issues.

Penetration pricing is ideal for businesses that want to quickly gain market share and establish themselves as a player in a new market.

Some examples of companies that have used penetration pricing are Spotify and Uber. Spotify entered the music streaming market by offering a free version of its service to attract users. Meanwhile, Uber started by offering low prices and tons of promos to gain market share.

Strategy #5. Price Skimming

This model involves setting high prices for new or innovative products or services. Price skimming works well for businesses with unique or innovative products or services. It’s also ideal for businesses that want to maximise profits on new or innovative products or services.

This pricing strategy requires a deep understanding of your target audience and their willingness to pay.

Sony Corporation used price skimming when it introduced its new PlayStation 5 gaming console. They set a high price for early adopters who are willing to pay a premium for the latest gaming technology.

Strategy #6. Economy Pricing

With this pricing model, you set low prices for your budget products. Economy pricing works well for businesses with low overhead costs and the ability to produce bulk quantities. As such, this pricing model requires careful planning to avoid sacrificing quality.

Economy pricing is ideal for businesses that want to position themselves as affordable options for budget-conscious customers. Companies like Dollar Tree and McDonald’s implement this model.

What To Do Next

Now that you know the six common pricing strategies, here are some actionable takeaways to help you choose the best pricing model for your small business:

  • Define your target audience – You can’t choose the right pricing model without knowing your target audience. So, spend some time researching your audience to better understand their wants, needs, and desires. Consider their demographics, psychographics, and buying behaviours.

This information will help you determine which pricing strategy will work best for your business.

  • Evaluate your costs – Before choosing a pricing model, make sure you have a good understanding of your costs. Consider all the costs involved in producing and delivering your product or service, including direct and indirect costs.

Doing so will help you ensure that you are covering all your costs and making a profit on each sale.

  • Consider your unique selling points – What makes your products or services unique? Think about how your business’s unique selling points can help you position yourself in the market and choose the right pricing model.

For example, if your product is of high quality, you may want to consider value-based pricing. But if your product is innovative, you may want to consider price skimming.

  • Monitor your competitors – Keep an eye on your competitors’ prices. You want to ensure that you are staying competitive in the market. This will help you determine whether you need to adjust your prices to remain competitive or whether you can now charge a premium for your product or service.
  • Regularly review and adjust your pricing – Pricing is not a one-time decision. You must regularly review and adjust your pricing to ensure you’re maximising profits and staying competitive in the market.

When doing your review, consider factors such as changes in costs, the market, and consumer behaviour.

  • Choose a pricing model that aligns with your business goals – Consider your revenue goals and choose a pricing model that aligns with them.

For example, if your goal is to maximise profits, you may want to consider value-based pricing. But if your main goal right now is to gain market share, you may want to consider penetration pricing.

Secure More Funds For Your Business

Choosing the right pricing model for your small business is essential to your success. So, consider your target audience, competitors, costs, and unique selling points when selecting a pricing model. And regularly monitor your pricing and adjust as needed.

All these will help you ensure profitability and customer satisfaction.

We can’t stress enough that pricing is not a one-time decision. It’s an ongoing process that requires careful consideration and planning. And by choosing the right pricing model, it becomes easier to maximise profits, attract new customers, and retain existing ones.

Now, improving your pricing model is just one of the ways you can get more funding to grow your business. Another option is to apply for unsecured loans. This option allows you to get your funding right away so you can start your journey to growth immediately.

If you need further assistance in this area, Unsecured Finance Australia is here to help. Apply online and you can receive your approval within 24 hours.

Find out more by taking a look at our unsecured business loans.

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