15 Mistakes Small Businesses Make When Setting Pricing (And How to Avoid Them) [Examples]

Setting the right price isn’t just about numbers – it’s about strategy, clarity, and delivering value. Whether you’re an electrician, builder, IT managed service provider, manufacturer, distributor, or mechanic, pricing services and materials correctly is critical to a small business’s sustainability.

As a small business coach specialising in growth strategies for service-based businesses in Australia, I’ve seen firsthand how proper pricing can make or break a company. I’ve created this guide to help small business operators understand common mistakes and avoid them.

The challenge that small businesses face is that they don’t have access to the same level of expertise that big businesses have. Corporates can employ analysts, marketing specialists and finance experts to run data modelling, conduct deep financial analysis and run A/B tests of omnichannel marketing campaigns. In Australia alone, Programmed Services have over 400 full time employees in marketing and finance roles, and Bunnings has over 1500! That’s before adding in the external consultants. I wanted to point out the scale of advantage that these large businesses have because I’m going to show you how you can take what they’ve done and use it in your business (for free). You’re welcome.

 

Why Pricing Strategies Matter for Service Businesses

Before I go into detail about the common mistakes, I want to explain why pricing is crucial for service businesses that also use materials:

• Pricing directly impacts your profit margins (sometimes the obvious needs to be stated)
• It influences customer perception of your brand – think of Kmart’s cheap and cheerful pricing, versus David Jones premium position
• Proper pricing allows for sustainable growth – employing more people, investing in better systems, expanding your services
• It can differentiate you from competitors

Now the “why” is clear, I’ll explain 15 common mistakes small businesses make when setting pricing, why they happen, why they hurt your business, and what you can learn from some well-known brands that are getting it right.

Pricing Mistake 1: Undervaluing Your Services

Mistake: Many small businesses, especially when starting out, set their prices too low to try to attract customers. It’s called “buying customers”.

Why it happens: Fear of losing customers to competitors or lack of confidence in the value of your services.

Why it’s bad: Low prices can give the impression of low quality. While there may be times this strategy is useful or even necessary – for example in the early stages of business, or during a slower period – it’s very hard to change a client’s perception of your brand. And harder still to increase your prices once your client has become hooked on your cheaper pricing.

 

Example of how it’s done right: Bunnings Warehouse, known for its “lowest prices are just the beginning” slogan, doesn’t actually offer the lowest prices. Instead, they focus on value-added services and a price guarantee, which allows them to maintain higher margins while still attracting customers.

Pricing Mistake 2: Ignoring Overhead Costs

Mistake: Failing to factor in all business costs when setting prices.

Why it happens: Overlooking indirect costs or underestimating expenses. For example, many trades businesses such as electricians, plumbers and landscapers don’t include small on-costs such as Leave Plus, uniform costs, vehicle repairs and toll fees.

Why it’s bad: This can lead to pricing that doesn’t cover all costs, resulting in reduced profitability or even losses.

Example: Xero, the accounting software company, prices its products to cover not just direct costs but also research and development, customer support, and marketing expenses, ensuring long-term sustainability.

Pricing Mistake 3: Not Differentiating Between Cost and Value

Mistake: Basing prices solely on costs without considering the value provided to customers.

Why it happens: Focus on internal metrics rather than customer perception.

Why it’s bad: This approach can lead to missed opportunities for higher margins on high-value services.

Example: Caterpillar Inc. prices its heavy machinery based on the value it provides to customers in terms of reliability, durability, and productivity, not just on production costs.

Pricing Mistake 4: Using a One-Size-Fits-All Approach

Mistake: Using a one-size-fits-all pricing approach for all customers.

Why it happens: A simple, standardised approach can seem easier to manage. It also seems easier to set one single price than to undertake  analysis and work out what different prices could work in the market and what revenue would be generated, or potentially missed.

Why it’s bad: You may undercharge for premium services or overcharge for basic ones, losing potential revenue and alienating customers. Not segmenting your markets (for example: VIPs vs B-grade clients vs one-off buyers) can result in lost opportunities to capture different market segments with different offerings and maximize revenue.

Example: Optus offers various mobile plans tailored to different customer segments, from budget-conscious to high-data users, maximizing their market reach and revenue potential.

Pricing Mistake 5: Neglecting to Review and Adjust Prices Regularly

Mistake: Setting prices once and forgetting about them.

Why it happens: Complacency or fear of losing customers with price changes.

Why it’s bad: This can lead to eroding margins as costs increase over time8.

Example: Woolworths regularly reviews and adjusts its prices based on market conditions, supplier costs, and competitive positioning.

Pricing Mistake 6: Overcomplicating Pricing Structure

Mistake: Creating a pricing structure that is too complex for customers to understand.

Why it happens: Attempting to cater to every possible scenario or customer type.

Why it’s bad: Complexity can confuse customers and make it difficult for them to make purchasing decisions.

Example: SimPRO, a job management software, offers clear, tiered pricing plans that are easy for businesses to understand and choose from. They help buyers make assess their options by providing a comparison table that easily explains what’s included – and excluded – in the 3 product levels.

Pricing Mistake 7: Ignoring Competitor Pricing

Mistake: Setting prices without considering what competitors are charging.

Why it happens: Lack of market research or overconfidence in your own product/service.

Why it’s bad: This can result in prices that are either too high (losing customers) or too low (leaving money on the table).

Example: SnapOn Tools regularly benchmarks its prices against competitors while emphasising its premium quality to justify higher price points.

Pricing Mistake 8: Not Communicating Value Effectively

Mistake: Failing to clearly articulate why your services are worth the price.

Why it happens: Assumption that value is self-evident or difficulty in quantifying benefits.

Why it’s bad: Customers may not understand the full value of your services, leading to price resistance.

Example: Milwaukee Tools effectively communicates the value of its power tools through demonstrations, warranties, and highlighting innovative features that justify premium pricing.

Pricing Mistake 9: Discounting Too Frequently

Mistake: Relying on frequent discounts to drive sales.

Why it happens: Short-term focus on boosting sales numbers.

Why it’s bad: This can train customers to wait for discounts and devalue your regular pricing8.

Example: Chemist Warehouse maintains an “everyday low price” strategy rather than relying on frequent discounts, building customer trust in consistent pricing.

Pricing Mistake 10: Not Considering Lifetime Value of Customers

Mistake: Focusing only on immediate transaction value rather than long-term customer relationships.

Why it happens: Short-term revenue goals overshadowing long-term strategy.

Why it’s bad: This approach can miss opportunities for building loyal, high-value customer relationships.

Example: Officeworks offers a rewards program that encourages repeat business and considers the lifetime value of customers in its pricing and marketing strategies.

Pricing Mistake 11: Failing to Price for Profit

Mistake: Setting prices that merely cover costs without ensuring a healthy profit margin.

Why it happens: Fear of losing customers to lower-priced competitors.

Why it’s bad: This can lead to unsustainable business practices and limit growth potential4.

Example: Guzman Y Gomez maintains premium pricing in the fast-food sector, focusing on quality and experience to justify higher prices and ensure profitability.

Pricing Mistake 12: Not Offering Tiered Pricing Options

Mistake: Providing only one pricing option for services.

Why it happens: Simplicity in offerings or lack of service differentiation.

Why it’s bad: This can limit appeal to different customer segments and miss upselling opportunities3.

Example: Uber offers various service tiers (UberX, Uber Comfort, Uber Black) to cater to different customer needs and budgets.

Pricing Mistake 13: Ignoring Seasonal Demand Fluctuations

Mistake: Maintaining static pricing throughout the year despite seasonal demand changes.

Why it happens: Lack of dynamic pricing strategy or fear of complicating pricing.

Why it’s bad: This can result in missed opportunities during high-demand periods and struggles during low seasons.

Example: Hello Fresh adjusts its meal kit pricing and offers based on seasonal ingredient availability and demand fluctuations.

Pricing Mistake 14: Not Accounting for Future Growth

Mistake: Setting prices that don’t allow for business scalability.

Why it happens: Focus on current operations without considering future expansion needs.

Why it’s bad: This can lead to pricing structures that become unsustainable as the business grows.

Example: Amazon’s pricing strategy in Australia includes considerations for long-term market penetration and infrastructure development.

Pricing Mistake 15: Not Testing Different Pricing Strategies

Mistake: Sticking to one pricing strategy without experimenting with alternatives.

Why it happens: Comfort with the status quo or fear of disrupting existing customer relationships.

Why it’s bad: This can result in missed opportunities to optimize pricing for maximum profitability.

Example: Pet Barn regularly tests different pricing strategies, including bundle deals and loyalty programs, to find the most effective approach for different product categories.

Checklist for Setting Prices:

• Calculate all costs (direct and indirect) associated with your service
• Research competitor pricing in your market
• Identify your unique value proposition
• Segment your customer base and consider different pricing tiers
• Set clear profit margin goals
• Develop a clear value communication strategy
• Implement a system for regular price reviews and adjustments
• Consider the lifetime value of customers in your pricing strategy
• Test different pricing strategies and analyze results
• Ensure your pricing allows for future business growth
• Develop a policy for handling discounts and promotions
• Create a simple, easy-to-understand pricing structure
• Factor in seasonal demand fluctuations
• Align pricing with your overall brand positioning
• Seek feedback from customers on perceived value and pricing

By avoiding these 15 common mistakes, you can build a pricing strategy that not only covers your costs but also reflects the true value of your service. Learning from industry giants like Xero, Uber, and Hello Fresh shows that clear, agile, and value-focused pricing is not just possible; it’s a proven path to success.