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The Green
Critical—but frustrating. That’s how many Canadian business owners describe the process of pricing their goods and services. Set prices too low, and revenue takes a hit. Too high, and customers might head elsewhere. So how do you find the sweet spot?
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This practical guide from Clover breaks down the most common pricing strategies for small businesses, and how those strategies can impact profit margins and long‑term growth. Use this guide to compare the pros and cons of different pricing approaches, then apply them in a way that supports your current operations and future goals.
When deciding what to charge for their products and services, most business owners rely on a specific methodology or process—known as a pricing strategy. Depending on your business type (typically retail, services, or food and beverage), some strategies will feel more relevant than others.
Feel free to test-drive any of these strategies before settling on the one that works best for your business.
Remember, smart pricing can help drive demand for your products and services. Sales figures tell part of the story and can reveal whether your prices are set effectively. Read more about the most common pricing methodologies below.
This is a cost-based strategy of setting prices based on a specific return-on-investment (ROI) goal. For example, if you want to recoup startup and operating costs within your first year, annual sales must equal those costs (also known as break-even pricing). To generate profit, sales need to exceed that break-even point.
Say you spend $10,000 to stock bottles of handcrafted beard oil in your new shop. The same formula applies whether your business is brick and mortar, virtual, or hybrid. Operational costs reach an additional $15,000 for the first year. Your product costs $3.00 to produce. If you set the retail price at $10.00, that’s a profit of $7.00 per unit. However, you would need to sell 3,571 units at $10 each just to break even. To turn a profit more quickly, you’d need to raise prices, increase sales volume, or both.
If inflation or supply chain changes increase production costs—or if weak demand forces you to lower prices—this pricing strategy can become difficult to sustain.
Also known as markup pricing, this strategy sets the selling price by adding a fixed percentage to the cost of producing an item. Imagine you’re selling frozen empanadas that cost $1.20 to make. A markup of 40% means the empanadas’ retail price would be $1.68. The trick is finding a formula that delivers enough profit for your business to thrive.
A subset of cost-plus pricing, keystone pricing sets the retail price at exactly double the wholesale cost. If a retailer purchases beaded handbags for $15 wholesale, they would retail for $30—resulting in a 100% markup.
While keystone pricing once worked well for brick-and-mortar retailers, today’s eCommerce environment makes it more challenging. Consumers can easily compare prices online, making it difficult for small businesses to justify doubling wholesale prices across the board.
Competitive pricing is based on market averages. Once you identify the going rate for similar products or services, you can price your offerings slightly below, at, or above competitors’ prices.
For example, if you’re launching a lawn care service and nearby competitors charge between $45 and $70 per hour, pricing your service at $55 per hour may position your business as fairly priced and professional—without appearing low quality or overpriced.
Here’s a pricing strategy based on your knowledge of what customers are willing to pay. Unlike the cost-plus method, there’s no simple formula for determining value-based pricing. Before setting prices, you need to study your market closely, analyze the competition’s strategies, and gather as much buyer insight as possible.
Value-based is not a pricing strategy for mass-produced goods, but it could work if your offerings are one-of-a-kind or handmade. Luxury items tend to do well with value-based pricing because they are so differentiated from everything mass market. The downside is that this market is less stable, and you may have difficulty raising prices on goods already priced at a premium.
For new businesses entering crowded or competitive markets, penetration pricing can help attract attention. By offering similar products at lower introductory prices—or adding incentives such as free shipping or buy-one-get-one promotions—you can encourage customers to choose your brand over established competitors.
Penetration pricing works best when customers prioritize value and price over brand loyalty. However, margins may be tight early on, so businesses should plan carefully for long-term sustainability.
Food and beverage entrepreneurs face unique challenges when developing pricing strategies. Here are three pricing considerations to keep in mind:
Is your restaurant operating in a highly competitive area? Sharpen your competitive edge with these strategies:
Setting prices for high-end beef and seafood can be challenging when supply and market prices fluctuate. You may need to adjust your menu prices frequently. To offset the impact of those price changes, try balancing the menu with consistently-priced items such as chicken, pasta, or plant-based dishes.
Portion control plays a critical role in food and beverage pricing strategy. Ensure that your ingredients are standardized by monitoring their weight, count, and measurements. Precise, consistent portions help you control waste and other costs while improving financial projections.
Business trends such as inflation, supply chain challenges, and sustainability continue to shape pricing decisions for Canadian small businesses. No matter which pricing strategy you choose, keep the following points in mind:
If you want to learn more about how Clover can help you accept payments, run your business and sell more, please contact your Clover Business Consultant. You can also follow us on Facebook and Instagram.
This information is intended solely for informational purposes and should not be interpreted as legal, financial, or tax advice. Readers are strongly advised to consult with their attorneys, financial advisors, or tax professionals to obtain guidance tailored to their specific circumstances.
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