Pricing Strategy for Small Business: Cost-Plus vs Value Pricing

Cost-plus pricing tells you the floor you can't go below; value-based pricing tells you the ceiling your market will pay. Most Australian small businesses do neither — they glance sideways at a competitor's website, shave a bit off, and live with the consequences for years. Here's how to work out your real costs, choose a margin that survives contact with reality, and lift prices without losing the customers worth keeping.

The three ways to set a price

Method	How it works	Best for	The trap
Cost-plus	Add up what it costs you, add a margin	Products, stock, anything with a clear unit cost	Undercounts your costs, ignores what the work is worth
Competitor-based	Price near what similar businesses charge	Commodity products, crowded local markets	You inherit a competitor's cost structure and their mistakes
Value-based	Price against the result the customer gets	Services, specialist skills, anything that saves or makes money	Needs you to understand the customer's numbers, not just yours

You need all three: cost-plus sets the floor, competitors set the credible range, value sets the ceiling. Pick your number in that range deliberately rather than by accident.

Work out your floor: what an hour really costs you

Cost-plus gets a bad name because most people do it badly: they cost the materials and forget everything else.

The billable hours trap

You do not have 2,080 hours a year to sell. Four weeks off plus a fortnight of public holidays and sick days leaves about 46 working weeks — 1,748 hours at 38 hours a week. Subtract quoting, invoicing, chasing payment, marketing and travel between jobs, and most solo operators bill 55-65% of that. Call it 1,050 billable hours.

Now add up what those hours have to pay for:

Item	Annual amount
Your target income (before tax)	$95,000
Super you want to put away (12%)	$11,400
Vehicle, fuel and running costs	$9,000
Insurance	$2,400
Tools and equipment	$3,000
Phone and internet	$1,800
Software and accounting fees	$2,400
Marketing	$2,400
Other overheads	$1,000
Total to recover	$128,400

$128,400 ÷ 1,050 hours = $122.29 an hour, excluding GST. That's break-even against your own target — no profit buffer, nothing for bad debts, no allowance for the quiet month. Add 15% and you're at about $141 an hour ex GST, or $155 including GST for a consumer.

Compare that with charging "the going rate" of $85 an hour: 1,050 × $85 = $89,250, minus $22,000 of overheads, leaves $67,250 to cover your income, super and tax — full-time hours, all the risk, and less than you'd earn on wages doing the same work for someone else.

If you employ people, add the on-costs

Wages are the smallest part of what staff cost. Take an employee on $35 an hour (the national minimum wage is $26.44, or $33.05 for a casual with the 25% loading, as at September 2026 — see minimum wages and penalty rates). Over 1,976 paid hours that's $69,160 in wages, plus $8,299 of super at 12% and roughly $1,383 of workers compensation at 2% — about $78,842 a year. Your workers comp rate depends on your state and industry, so use your actual premium.

But you don't get 1,976 hours of work. Strip out four weeks of annual leave, ten days of personal leave and about 11 public holidays and you have roughly 1,664 hours, so the real cost is $47.37 per available hour. Bill 80% of those and your break-even charge-out rate is $59.21 an hour before any profit. Charge $75 for that person's time and your margin is about 21%, not the 114% markup it looks like.

Products: price from margin, not markup

This is the single most common pricing error, and it costs real money. Markup is calculated on your cost. Margin is calculated on your selling price. They are not the same number.

Say an item lands in your store for $60 (ex GST, including freight and any duty — always use the landed cost, not the invoice price). You want a 40% gross margin.

The mistake: add 40% → $60 × 1.4 = $84. Your gross margin is ($84 − $60) ÷ $84 = 28.6%.
The fix: divide by (1 − margin) → $60 ÷ 0.6 = $100. Gross margin = $40 ÷ $100 = 40%.

Gross margin you want	Divide your cost by	A $60 cost becomes
30%	0.70	$85.71
40%	0.60	$100.00
50%	0.50	$120.00
60%	0.40	$150.00
65%	0.35	$171.43

What counts as a healthy margin

There's no universal answer — a supermarket survives on single-digit net margins and a consultancy doesn't. The best free Australian yardstick is the ATO's small business benchmarks, covering around 100 industries and drawn from more than two million businesses' tax returns and activity statements. The latest set uses 2023-24 data (as at September 2026) and shows typical ranges for cost of sales, labour, rent and total expenses as a share of turnover, split by turnover band.

Check whether your cost of sales sits inside the range for your industry: if it's well above, your pricing is the problem, not your effort. The ATO also uses these benchmarks to pick audit targets, so sitting outside the range is worth being able to explain. If gross margin is a new idea, start with reading a profit and loss statement.

Value-based pricing: charge for the result, not the hour

Cost-plus asks "what do I need?" Value pricing asks "what is this worth to the buyer?" A bookkeeper who stops a client's BAS being lodged late, a web developer who doubles a plumber's enquiries, an electrician who gets a cafe trading again on a Saturday morning — none of that value has anything to do with how long the job took.

To price on value you need three answers from the customer, which means asking before you quote:

What does the problem cost them now? Lost sales, wasted hours, penalties, rework, staff turnover.
What's it worth to fix it? Put a dollar figure on the outcome, even a rough one.
What's their alternative? Doing nothing, doing it in-house, or the other quote on the table.

If a $4,000 job saves a client 6 hours of admin a week — roughly 280 hours a year — say so in the quote. Value pricing isn't a mind trick; it makes the return visible so the price stops being the only thing on the page.

Two rules keep it honest. Never make a claim you can't back up — overstating results is misleading conduct under the Australian Consumer Law, and the rules on advertising claims apply to a quote as much as to a Facebook ad. And scope fixed-price work tightly in writing, so "value" doesn't quietly become "unlimited".

Package your prices: good, better, best

Three tiers beat one price for a simple reason: it changes the customer's question from "yes or no?" to "which one?" Build them properly:

Good — the entry option, deliberately limited; it puts a low number on the page and makes the middle look sensible.
Better — where you want most customers to land. Put your best-value inclusions here.
Best — priced high, with extras only some customers need; it anchors the page upward and occasionally sells to someone who was never going to haggle.

Name tiers for the customer ("Sole Trader", "Growing Team", "Full Service" beats "Bronze, Silver, Gold"), and make the difference scope and speed, not quality — nobody wants the version you did badly on purpose.

Psychological pricing, briefly

Charm pricing ($99 rather than $100) suits retail and impulse purchases; it undercuts you when you sell expertise, where round numbers read as confidence. Show the dearest option first, and discount only for a stated reason with an end date — an unexplained sale teaches customers your normal price is fiction.

Pricing rules you have to follow

Show a single total price to consumers. Under the Australian Consumer Law you must display the total price as a single figure, including GST and any unavoidable fees. You can show components alongside it, but the total must be at least as prominent. If you display prices only to other businesses, you can quote ex GST — just label it clearly. Penalties are not trivial: for conduct on or after 28 March 2026, the maximum penalty for a corporation breaching the ACL is the greater of $100 million, three times the benefit obtained, or 30% of adjusted turnover during the breach period.

Plan for GST before you cross the threshold. Registration is compulsory once your turnover hits $75,000 in a rolling 12 months. If you keep your consumer prices the same after registering, you're handing about 9% of every sale to the ATO out of your own margin — a $100 sale becomes $90.91 of revenue. Decide in advance whether to raise prices or absorb it — see how to register for GST.

Card surcharges are ending. From 1 October 2026 (as at September 2026), surcharges are being removed on the designated eftpos, Mastercard and Visa networks. Until then, a surcharge can't exceed what that payment type actually costs you. Card acceptance still costs money after October, so work out your average cost of acceptance now and build it into your prices rather than losing it.

When and how to raise your prices

Review prices at least annually, and immediately when supplier costs, wages or insurance jump. The maths is friendlier than owners fear. On a $100 price with $60 of cost, a 5% rise lifts gross profit per sale from $40 to $45 — so you'd need only 88.9% of your previous volume to make the same gross profit.

Your gross margin	Volume you can lose after a 5% rise	Extra volume needed after a 5% discount
30%	14.3%	20.0%
40%	11.1%	14.3%
50%	9.1%	11.1%
60%	7.7%	9.1%

Read that right-hand column again before you offer your next discount. Doing it well:

Give existing customers 30 days' notice in writing, with the new price and the date it starts.
Explain once, briefly, and don't apologise. "Our supplier and wage costs have risen; our prices increase from 1 November" is enough.
Honour quotes already accepted. Put an expiry date on future ones.
Raise new-customer prices first if you're nervous; the objections you feared usually don't arrive.
Expect to lose a few customers — if you lose none, you didn't raise enough. The ones who leave over 8% are rarely funding your business.

Then watch cash, not just sales — a rise takes weeks to work through your debtors, and cash flow management covers how to track it.

Key takeaways

Cost-plus sets your floor, competitors set the credible range, value sets your ceiling — use all three, not a rival's price tag.
Divide your annual costs and target income by realistic billable hours, not hours worked; most solo operators bill 55-65%.
Margin is calculated on the price, not the cost — for a 40% margin, divide cost by 0.6 rather than adding 40%.
Staff cost far more than their wage: super, workers compensation, leave and downtime push a $35 wage past $59 of billable time.
Show consumers a single GST-inclusive total price, and build card costs into prices before surcharges go on 1 October 2026.
On a 40% margin, a 5% rise lets you lose 11% of your volume and still make the same gross profit.

Where to get help

ATO small business benchmarks (ato.gov.au) — free industry ratios, also available through the Business Performance Check tool.
ACCC (accc.gov.au) — price display rules, component pricing and misleading pricing conduct.
Reserve Bank of Australia (rba.gov.au) — the conclusions paper and FAQs on removing card payment surcharges.
Business.gov.au — pricing guidance and free or low-cost advice through your state's business advisory service.
Your accountant or bookkeeper — to check your cost base, margin by product or service line, and the tax effect of a price change.
A lawyer — before you publish tiered pricing, subscription terms or fixed-price scopes.