Pricing Strategy for Small Business: How to Set Prices That Sell

Pricing is one of the most powerful levers in your business. Get it right, and you'll attract customers, cover costs, and generate healthy profits. Get it wrong, and you'll struggle to survive.

Yet many small business owners set prices almost randomly - matching competitors, picking round numbers, or just "feeling" their way to a price. This guide shows you how to price strategically.

Why Pricing Matters So Much

A 1% improvement in pricing typically improves profits by 8-11%. Compare that to:

• 1% increase in sales volume: ~3% profit improvement
• 1% reduction in variable costs: ~6% profit improvement
• 1% reduction in fixed costs: ~2% profit improvement

Pricing is your highest-leverage opportunity - yet most businesses spend more time on cost-cutting than on pricing strategy.

The Three Core Pricing Strategies

1. Cost-Plus Pricing

Add a markup to your costs to determine price. Simple and ensures you cover costs, but ignores what customers are willing to pay.

Best for: Commodities, low-differentiation products, cost-plus contracts

2. Value-Based Pricing

Price based on the value your product/service delivers to customers, not what it costs you. Can capture significantly more profit than cost-plus.

Best for: Services, unique products, B2B, premium offerings

3. Competitive Pricing

Set prices relative to competitors. Can be at parity, at a premium, or at a discount depending on your positioning.

Best for: Established markets with clear alternatives

Calculating Your Minimum Price

Before choosing a strategy, know your floor - the minimum price at which you can operate profitably.

Step 1: Know Your Costs

Step 2: Calculate Break-Even

Step 3: Set Target Margin

Once you know break-even, add your profit target:

Pricing Psychology: What Makes People Buy

Charm Pricing

Prices ending in 9 ($9.99, $199) consistently outperform round numbers. The left-digit effect makes $9.99 feel much cheaper than $10.00.

Anchor Pricing

Show a higher "reference" price before your actual price. The original price becomes an anchor that makes the selling price feel like a deal.

Tiered Pricing

Offer multiple options (good, better, best). Most customers choose the middle option, and the presence of a premium tier makes the middle seem more reasonable.

Bundling

Combine products/services at a discount versus buying separately. Increases average transaction value and perceived value.

Service Pricing: Hourly vs Project vs Value

Hourly Pricing

• Pros: Simple, fair for uncertain scope
• Cons: Penalises efficiency, income ceiling, client anxiety about costs
• Best for: Ongoing work, uncertain scope, time-and-materials contracts

Project/Fixed Pricing

• Pros: Client certainty, rewards efficiency, higher profit potential
• Cons: Scope creep risk, need accurate estimating
• Best for: Defined deliverables, repeat project types

Value-Based Pricing

• Pros: Highest profit potential, aligns interests with client
• Cons: Requires understanding client's business, harder to quote
• Best for: High-impact work, measurable outcomes

How to Raise Prices

Price increases are necessary as costs rise and your value grows. Here's how to do it well:

When to Raise Prices

• Costs have increased significantly
• Demand exceeds capacity
• You've improved your product/service
• Competitors have raised prices
• You haven't raised prices in 1-2 years

How to Communicate Price Increases

1. Give advance notice: 30-60 days for existing customers
2. Explain the why: Briefly - rising costs, improved service
3. Emphasise value: What they're getting, not just price
4. Offer options: Grandfather existing contracts, offer longer-term lock-in
5. Be confident: Don't apologise excessively

Testing and Optimising Prices

A/B Testing

For online sales, test different prices with different customer segments:

• Show different prices to different traffic sources
• Test different price points on new customers
• Measure conversion rate AND total revenue

Market Research

• Ask customers what they'd expect to pay
• Survey willingness to pay at different price points
• Analyse competitor pricing carefully

Price Sensitivity Indicators

• Low sensitivity: Few questions about price, quick decisions
• High sensitivity: Price comparisons, negotiations, delayed decisions

Common Pricing Mistakes

1. Pricing too low: Undercharging signals low value and attracts price-sensitive customers
2. Competing on price alone: There's always someone cheaper - find other differentiators
3. One-size-fits-all: Different customers have different willingness to pay - segment your pricing
4. Not knowing your costs: You can't price profitably if you don't know your true costs
5. Fear of losing customers: Some customers should be lost - those who can't afford you
6. Discounting too quickly: Train customers to wait for sales and you'll never sell at full price
7. Ignoring positioning: Your price is part of your brand - premium price = premium perception

Industry Pricing Benchmarks

Pricing Checklist

Key Takeaways

• Price is your highest-leverage tool: 1% price increase = 8-11% profit increase
• Know your costs: You can't price profitably without knowing your numbers
• Consider value, not just cost: Value-based pricing captures more profit
• Use psychology: Charm pricing, anchoring, and tiering all work
• Raise prices regularly: Annually at minimum to keep up with costs
• Test and optimise: Your first price doesn't have to be your final price
• Don't compete on price alone: Find other ways to differentiate