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Getting your price right 

Setting your pricing can be a tricky balancing act – but it is important. Here’s a guide on how you could get the balance right.

Pricing is an important responsibility as a business owner. In this article we outline how you could:

  • Set the right price for your goods and services – not too high to deter customers, but not too low that it puts your profitability at risk;
  • Defend and justify your price to customers (to avoid the temptation to give away your margin by offering discounts to get the sale); and
  • Know when - and how - to raise your prices.

Setting your price

Have a sensible pricing strategy

A number of businesses don’t have a proper pricing strategy - so it’s not surprising that they often struggle to set their prices. Even worse, without a pricing strategy your prices may not produce enough revenue to meet the costs of your business.

It’s essential to do your due diligence when setting your pricing. That means being clear about how much profit you want to make, your costs, what your competition is charging and what your customers would be willing to pay for your product and service. Our Break-even calculator can help you establish the minimum income you need to stay in business.

You also need to know what your business objective is. For example, is it to:

  • Maximise your profits by charging as much as you can. Remember by charging significantly higher than the competition you could risk having customers go elsewhere, but that could be ok if you still get enough customers to make a profit (and you are doing less work).
  • Increase or hold your market share. This choice means you might have to sacrifice some of your profits, and possibly charge less to certain customers.
  • Match or beat the competition’s prices. Pricing low can work, especially if you are aiming to grab new customers. But be careful about competing solely on price – especially if your competitors are larger businesses with deeper pockets. You also don’t want customers thinking that because you’re cheaper, your goods or services are lower quality than the competition.

Take your time, do some research (don’t guess) review your strategy regularly and be prepared to make changes if necessary. When your prices are high enough to cover costs, give you a reasonable return, and are attractive to customers, you’ll know your pricing strategy is working.

Defending your price

If you’ve done your homework you can be confident in your pricing strategy. But you also need to instil the same confidence in your customers. Here are some tips on how you could make your customers happy to pay the price you’re charging.  

  • Point out your added value. There’s more to a product than price alone. Things such as quality, productivity, guarantees, fast delivery or free installation are all of value to customers. Identify the areas where your product or services adds value, communicate these to your customers and make sure your staff do too.
  • Ease your customer’s ‘pain points’. Customers are often willing to pay more for products or services that solve their problems or frustrations. For example, people are often frustrated by tradesmen not turning up on time. Many customers would be happy to pay a higher price if you can guarantee that you’ll arrive on time - or it’s free?
  • Differentiate yourself from online competitors. These days’ people often research prices online and expect businesses to match online competitors. You could counter this by focusing on the worries and issues people have with internet purchases – for example, delivery costs, returns, warranties and the ability to ‘try before you buy’. Show them how buying from you could avoid these issues.
  • Stand your ground. If your existing or prospective customers query your price, don’t automatically offer a discount. Not budging on price might actually reassure your customers that you are the right business to deal with. Remember too that customers who are focussed solely on price may not be very loyal or very profitable. Consider how important the customer is to you, and the likelihood of ongoing business from them, before offering a discount.
  • Stay cool. If a customer challenges you on your price, don’t take it personally. Explaining why your product or service is worth the price in a professional and friendly way will go a long way towards winning people over.

Increasing your prices

You should always be seeking to increase your prices over time, if only so that you can keep up with inflation. Increasing prices widens your margins and frees up cash you might need for business growth. However, many small businesses in particular are reluctant to raise their prices for fear of alienating their customers. Here are some tips to help.

  • Check your costs. If you’re worried about losing customers if you raise prices, you may be able to improve margins by reducing costs instead. For example, consider changing providers for things like power or telecommunications, using technology like Skype to reduce travel expenses, or removing slow-moving products from your inventory.
  • Communicate with your customers. If appropriate, tell them why your products or services are worth the increase (see ’Point out your added value’ above).
  • Research the market. Make sure there’s enough demand for your product or service to justify a price hike. How do your prices (and your products) compare to your competitors?
  • Provide the best customer experience you can. Make sure your staff are on the ball and provide them with everything they need to do their job properly. Make an effort to know your best customers and deal with complaints quickly and efficiently.
  • Stagger increases. Consider staggering the price increases of your different products over time, instead of raising them all at once.

Tools & resources

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This material is provided as a complimentary service of ANZ Bank New Zealand Limited ("bank"). It is prepared based on information and sources the bank believes to be reliable. It is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to acting in reliance on it. To the extent permitted by law the bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material.

This material is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product. If you wish to consult an ANZ Business Specialist, please contact us on 0800 269 249.