How to choose a pricing model

A quick-reference guide to small business pricing models, and how one health and beauty retailer sets prices.

Increased operating costs, higher inflation and unpredictable or unstable revenue are among the top concerns that business owners anticipate will be major challenges over the next 12 months.*

These rising costs can prompt small business owners to reconsider the pricing model for their products or services.

Finding the right pricing model first means identifying your objectives in setting a pricing strategy. For instance, identify if you are looking to establish your products or services in the market, competitively position your products or services, increase demand for your products or services, or a different strategy.

Then consider which method of pricing those products or services might best suit your business priorities:

  • A cost-based pricing model adds an additional margin to the cost of a product or service. Make sure to cover all additional costs such as GST and tax.
  • Using a competition-based pricing model, price your products or services at a similar rate to how your competitors price their products or services.
  • A value-based pricing model enables you to set prices based on your customers’ expectations for how much a product or service is worth.
  • There are multiple product-based pricing models to choose from, including penetration pricing and skimming pricing, which raises or lowers the price of a product or service after a certain period of time.

Let’s take a look at one of those methods, the cost-based pricing method, which uses the following formula:

Fixed overheads + Cost of goods sold + Desired profit = Cost-based price

As an example, if the value of your fixed overheads for one unit is $75, the cost of goods sold is $50, and your desired profit is $25, then the cost-based price you would set for the product is:

$75 + $50 + $25 = $150

The model you choose will depend on your business’s unique circumstances.

How Sassy Organics chooses a pricing scheme

For Aida Rejzovic, owner and founder of health and beauty online retailer Sassy Organics, determining a pricing scheme for her suite of vegan, organic products prioritises savings for the customer but is also influenced by shifts in supplier costs.

Aida shared how Sassy Organics is adapting to changing customer sentiment, and how she sets a pricing model accordingly.

What pricing model do you use and why?

Aida: “We more or less stick to the recommended retail price set by our suppliers – so, a cost-based method. This means we will generally sell products at the same price that our suppliers are selling it for, and we stay transparent with our consumers around the price of the products they buy.

“In light of inflation and other challenges, if a customer can get more value for their money, that helps.”

How is Sassy Organics responding to current challenges?

Aida: “Customers aren’t spending as much as they usually do, and I think every business is feeling the pinch. With my business, increasing the cost of certain goods is affecting our consumers because we have had to increase the recommended retail price for some – although not all – of our products.

“We’ve needed to follow the pricing structure set by our suppliers because our wholesale prices are also increasing – and unfortunately we’ve needed to pass those costs to consumers. But we are absorbing a lot of the shipping costs, and we’re not passing any of those costs onto consumers, even though our Australian shipping rates have increased.”

How important is keeping costs down for your customers?

Aida: “We are looking at lowering the cost of some of our products that sell well, so we can pass savings onto consumers where we can. We do this to retain customers. If customers are put off by high prices, they might turn to a competitor – and switch from organic to regular supermarket products.

“As a result, we’ve made the conscious decision to introduce a number of new, low-cost products. These are still certified organic but are not as expensive as some of the higher-end brands that we stock at the moment.”

*Prospa x YouGov SME Sentiment survey, January 2023

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The information in this post is provided for general information only and does not take into account your personal situation. Nothing contained in this post constitutes advice or an endorsement or recommendation of any kind by Prospa. Any links to third party websites are strictly for informational purposes only. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.

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