Choosing your pricing strategy
A pricing strategy is a plan you use to set prices for your products or services, so everyone gets the best value: you, your customers and your suppliers.
You can change your pricing, but it’s important to get it right. To do this:
- research your customers and what they’re willing to pay
- research your competitors
- understand the value you offer to suppliers and customers.
To decide your pricing, consider if:
- you make money from each sale after accounting for all your costs
- customers can afford your product or service and feel they get value from buying it
- suppliers and collaborators get value from working with you.
Price-sensitive customers
Customers typically buy less when prices go up, and more when prices go down. How much customers change their buying behaviour shows how price-sensitive they are.
If your customers are very price-sensitive:
- you lose sales if prices go up
- your revenue drops, because the extra income per item sold doesn’t make up for the reduction in sales.
If your customers are less price-sensitive:
- you only lose a few sales if prices go up
- your revenue stays the same or even goes up.
Customers are often:
- more price-sensitive for products with easy alternatives, or luxury goods they don’t really need
- less price-sensitive if it’s something special or unique.
Types of pricing strategy
Pick a strategy that suits your products or services, your situation, and your target customers. Here are some popular pricing strategies. Whichever you choose, always make sure you cover all your costs.
Pricing based on costs
Your selling price = margin plus manufacturing price.
This strategy is based on covering costs and adding a margin.
It’s best for keeping prices down to attract customers motivated by low price tags.
Businesses often use this pricing strategy to set prices as low as they can, as long as they can cover all their costs and still make a profit.
Low prices can help you:
- make sure you still make a profit on old products
- appeal to customers looking for cheaper options rather than top quality
- stand out in a competitive market
- boost the appeal of products with fewer features or lower performance.
Pricing based on competitors
Your selling price depends on your position amongst your competitors’ prices.
This strategy is based on understanding your market position and what competitors charge.
It’s best for businesses with a strong brand and a good understanding of their competitors and their industry.
To implement this pricing strategy, you can:
- match a competitor’s prices and use something else to win customers – for example, advertising or customer service
- go for higher or lower prices depending on how you compare for the value you offer, how well-known your brand is, and how much and how well you advertise.
Think about whether your competitors set logical prices, and how their costs compare to yours. Your price needs to be profitable.
Another option is penetration pricing. This is when you sell a quality product or service at a lower price and raise the price later if customers like the product.
Some downsides of this strategy are:
- you may lose customers when the special offer ends
- some may think your product is only worth the discount price.
Check your business can survive the special offer, even if you lose money on it. You need to be confident the special offer makes sense in the long run.
Pricing based on customer insights
Your selling price = customer’s willingness to pay minus margin.
This strategy is based on using customer research to figure out the highest price people are willing to pay.
It’s best for products or services likely to appeal to customers who value quality.
Overall, customer pricing could be right for you if all these are true:
- You know what customers are willing to pay.
- You are confident your product or service appeals to customers.
- You create extra value.
This strategy could include interviewing or surveying customers about their willingness to pay for a product or a service.
Improving your offering
You can use customers’ insights to shape your products or services and where you sell them.
Ask yourself the following questions to make sure your product or service reflects your customer insights.
Does it meet customers’ needs?
Customers expect a service to:
- start and finish on time
- be easy to book and pay for
- solve their problems.
Customers expect a product to:
- be easy to order and pay for
- be safe to use
- last a reasonable time.
If your product or service is different to what customers expect, make sure the difference makes it more attractive to them.
How and where will customers use it?
Think about how well your product or service fits its intended use. Consider all the settings your product or service could be used in.
What does it look like and how is it packaged?
The way a product looks affects its appeal. This includes both design and packaging. Appearance can also help a product fit your brand – for example, appearing modern, friendly or sustainable.
Looks and packaging affect services too – for example, offering a service with well-maintained equipment and vehicles suggests an idea of cleanliness.
Do customers know and love the brand?
Your name, logo, messaging and branding help customers connect with your business. Your website and online advertising do the same for your online services. Make sure this reflects what your customers need from your product or service.
How is it different to competitors’ offerings?
Your product or service could be different to what competitors offer in many ways, for example:
- cheaper or more expensive
- with different payment options
- faster, either to use or to receive after ordering
- meeting customers’ individual needs better
- better quality, either in appearance or in features or other aspects of performance
- more easily available locally.
Selling products and services together
Offering products or services that go together can:
- improve your offering
- give customers more value
- bring in more revenue
- help you grow your online business
- give you an advantage over competitors.
Use your customers’ insight to identify what products your customers might be interested in, and vice versa.
Using customer insights
Using your customers’ insights can help you decide where to sell so you can reach more people.
Ask yourself the following questions to help you decide where to sell. Once you believe your product or service compares well to your competitors, consider locating your business near them to encourage comparison.
Questions to ask yourself
Where do potential customers buy this type of product or service?
Choose somewhere that helps customers easily find you and buy from you.
What are your competitors doing?
Think about the experience customers have buying from you as opposed to your competitors. Consider:
- premises or work vehicles
- customer service in store or online
- customer support after making the sale or completing the service.
How can you improve so customers choose your product or service?
Make it as easy as possible for customers to make decisions, for example:
- do demonstrations or hands-on trials
- use product photos showing different angles and close-ups
- show your values.
Selling in the right places
Where you sell your product or service can influence who finds it and buys it.
Businesses sell in a range of physical or online places, for example:
- direct sales or bookings
- supplying products to a business that sells online or in their own stores
- online sales or bookings via your own website
- selling via a shared marketplace, such as Trade Me or Facebook Marketplace.
If it helps your customers, it’s a good idea to offer multiple options, for example, face-to-face and online.
Direct sales suit businesses that want to keep control of the sales experience. Having your own store helps you:
- make the most of your brand by creating an overall experience from entering the store to exiting
- build a brand people can easily connect with
- talk directly to customers and explain products to help them make informed decisions.
But you’ll need plenty of money to set up and run your store. You might also miss out on customers who would discover your products in a bigger store or in a chain.
Choosing a distributor means:
- you save money on storage and setting up your own store
- more customers may see your product.
But you have less opportunity to talk to customers directly. They’ll see your product alongside competitors. Not everyone will choose yours.
Exposing yourself to competition can help you quickly see how your product fares. It’s a good chance to make changes and catch up.
Remember, if you're selling overseas, you're exporting. Make sure you know the rules and regulations around exporting.
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