Price Point: Meaning, Examples & How It Works

When running a business in the retail sphere, everyone wants to maintain a high profit margin without losing customers to competitors. How can you figure out the perfect price for a product to keep both you and your buyers satisfied? You need to find the right price point for your stock. In this detailed guide, we will discuss what a price point is and review its example, discuss why it is important for business, and how to calculate it efficiently.

There are various definitions of a price point. The most common one is ‘the suggested retail price of a service or product’. Another one defines a price point as ‘the most balanced cost that maintains the highest demand and an optimal profit margin’.

This is a price which customers are willing to pay for a particular product over competing products. Briefly, a price point represents the best option for buyers who want to buy a product at an agreeable price, and for retailers that strive to earn as much as possible and outperform competitors.

Price point is based on the metrics of the supply and demand curve, but depends on many more economic factors, such as quantities demanded, quantities supplied, substitute product’s prices, and gross margin per unit.

Although a price point is also the cost of a product, it is not the same thing as any price. It is a specific point in the range of all possible prices that follow the supply and demand curve. It is the golden middle that allows a retailer to maintain sales volume and profit without losing customers to competitors. Once a price point is chosen, it becomes the product’s price.

When searching for the ideal price point, you should take into consideration a few crucial aspects.

The first step on the way to figuring out the best price is to assess your business goals. When you’re considering a product’s price, ask yourself a few questions:

• How much should the price of a particular product justify your expenses?
• Do I have any information on price elasticity for the item?
• To what extent is my audience price-sensitive?

With this information in mind, you can calculate the minimum price that allows you to make profit and perform adjustments when you proceed with A/B testing (we will discuss it below).

Note that such a thing as a ‘perfect price’ does not exist. Pricing is far more complex, as it depends not only on the supply/demand curve, but also market specifics, competitors, marketing, industry, etc.

Only after analyzing the whole gamut of details involved in selling the product in question can you accurately calculate an optimal price point that will satisfy your target audience and also be profitable for your business.

If you want your business to get a sufficient market share, you need to keep an eye on your competitors. Before determining a price point, do your own research into businesses operating side-by-side with you and assess their pricing policies. Coupled with your knowledge of profit goals, studying your competitors will help you decide which market price is the most optimal for your product.

To outperform your competitors, you might be tempted to take into account their price tags and start charging lower. However, it’s not always the best decision! According to a study by McKinsey, 80-90% of wrongly chosen prices are too low. So avoid underpricing your goods, because:

• afterwards, it will be more problematic for you to raise the prices without compromising sales volume;
• you risk having your product devalued in customers’ eyes;
• it may seriously affect your profit margin.

As mentioned above, the perceived value of your product is directly connected to the price. Positioning your brand may be another starting point for developing your pricing strategy. Is your product a premium one that’s intended to last longer or provide more features than its analogs? Or maybe you’re targeting lower market segments and developing cheaper alternatives than your competitors? Consider pricing based on your desired brand image.

You can use the price quality matrix as a basis of your pricing approach, or use other pricing philosophies to develop a price point that helps you build a certain brand reputation. Also, you can try dynamic pricing to figure out what works best. Make sure to follow your business goals and profit objections — neither of them should be compromised when you are trying to establish product value perception.

Lastly, it’s important to know who your average buyer is. Depending on the market segment, too low or too high price points can repel customers and make them misunderstand the product positioning. The pricing should align with the expectations of your target audience.

It is impossible to establish the right price point without testing, because analyzing the supply/demand curve is not enough in today’s highly competitive markets. You need to act in real-world situations, so a little bit of experimenting is a must.

Here’s how to get started and follow through with your strategy:

1. Study the market and consider all the details before suggesting your first price point.
2. Try charging different prices adjacent to the reference price point and see which one generates more profit while allowing you to stay competitive.
3. Keep monitoring the efficiency of the chosen price point in response to competitors’ actions and market conditions.
4. Try to keep your price point not too far from the average market price of the product.
5. Maintain the balance and remember that pricing your products too low can result in losing your profit margin, while overpriced items discourage customers and make them choose your competitors instead.

It’s essential to do A/B testing, at least on a basic level. Compare at least two price tags: see how buyers react to them, analyze the demand curve, and keep track of the reviews. This way, you can monitor your competitors’ pricing, as well as your customer experience, which is even more important.

As an example, let’s look at a premium shoe brand.

• A premium shoe brand knows that its average input for one pair of shoes is $350.
• Currently, the brand charges $1,500 per pair. At this price, it has about 90 buyers per day.
• Lowering the price to $1,000 would increase the number of buyers to 120.
• The brand could lower its price to $700, but it doesn’t want to go too low, because it plans to retain its premium status by targeting upper market segments.

Calculating the price point for a product can help you find the golden middle between your profit margin goals and customers’ willingness to purchase your product. It can be hard to consider all the variables underlying the price formation process, but you need to focus on three major aspects: study the competitors, define your target audience, and perform testing.

By the way, there’s no need to do labor-intensive manual price analysis — save your team dozens of hours by automating this task. Use Priceva’s price tracker: it will help you monitor competitors’ rates and send you notifications about changes to prevent price wars. Plus, it presents all data in the form of convenient tables and provides optimal price recommendations. Price tracking is faster and easier than ever!

To come up with a reference price point, you should calculate the total input, study the market, and define how you want to position your brand. After that, you should test several price points (at least two) to see which one works better for you.

The right price point for a product is the price that allows you to maintain the highest sales volume at the maximum profit margin. In other words, it’s the price that allows sellers to achieve a balance between what customers are ready to pay, and what helps them reach their business goals.

This is the average price at which you sell your goods or services over a certain period of time. It is important to keep tabs on this metric, because it reflects demand at different prices and shows how it influences your profit margin.

An Opening Price Point (OPP) is the lowest price of a particular item in a certain lineup, for example, TV sets or hand creams. It is used by retailers to attract customers and establish the perception of value through higher price points for other products in the same category.

To avoid repelling customers with a growing price point, it is important to choose the right timing and find ways to make the difference less pronounced. For example, some retailers play the numbers game (setting prices like $9.99), add improvements to items to justify the price, offer discounts to trigger sales, and so on. Alternatively, they can reduce the size of the product and leave the old price, or bundle their products.