Price Points

Price & Price Points

Pricing and pricing structure are the keys to success for many businesses.

Setting your price point too low will result in minimal profit while setting it too high could significantly cut sales - a successful pricing strategy is about finding the perfect balance.

But what do the terms' price' and 'price point' mean, what is the difference between the two, and how do price points work?

What is price point?

The term 'price point' refers to a specific point on a scale of possible prices for a product.

So what is the difference between 'price' and 'price point'?

The price point is a point on a scale of possible prices or a hypothetical, potential price. For example, you might predict that you will be able to sell 1500 products at a £120 price

On the other hand, the price is the specific amount charged for a product, the actual selling price.

How do price points work?

Price points are based on the elasticity function – predicting the number of units of a product that will sell at different prices. It is possible to predict the optimum price point by charting the number of units sold and the price per item,

Chart

A price point may also take into account:

  • The current market value
  • The position of the company
  • Competitor pricing
  • Volumes of supply
  • Demand
  • Other external factors

Selling a product for a low price will increase sales, but you might not make as much profit or even cover your costs. Conversely, a price point that is too high, while increasing your profit per unit, may limit your sales. Finding the right price point is all about balance.

Why do price points appear?

Price points appear for three key reasons:

Substitution price points

These price points occur at the price of a close substitution, for example, a similar product from a different brand. If a product's price rises above the cost of the close substitute, demand can drop significantly.

Customary price points

The market gets used to paying a specific price for a certain type of product. If you increase the price beyond this, sales will drop significantly.

Perceptual price points

These price points are based on how consumers perceive costs. For example, if a product's price increases from 99p to £1, demand may fall because it is perceived to be much higher by consumers.

Finding the right price point

Identifying the optimum price point for a product will require some testing. This will allow you to trial different prices and observe how they impact demand. Through this testing, you should put together a hypothetical demand curve to obtain the most effective price/demand ratio.

The graph below, for example, shows a hypothetical demand curve for a specific product.

Chart
Point A - £7
Point B - £4
Point C - £2

On this curve, we can see that at price point A, we will sell 10,000 units, at price point B, we sell 20,000 units, and at price point C, we will sell the most units totalling 35,000.

So, which point should the business opt for?

To establish this, we need to look at the amount of profit made at each point. Let's say the cost per unit is 50 pence. The profitability would be:

Price Point Price Units Sold Income Total Cost Profitability
Point A £7 10,000 £70,000 £5000 £65,000
Point B £4 20,000 £80,000 £10,000 £70,000
Point C £2 35,000 £70,000 £17,500 £52,500

So, based on this cost per unit, price point B is most profitable for the business. However, let's look at what happens if the cost per unit increases to £1.50, the profitability changes to:

Price Point Price Units Sold Income Total Cost Profitability
Point A £7 10,000 £70,000 £15,000 £55,000
Point B £4 20,000 £80,000 £30,000 £50,000
Point C £2 35,000 £70,000 £52,500 £17,500

So, in this scenario, you can see how much the cost per unit affects profitability, now price point A has become the most profitable option.

Conclusion

With so many ways for consumers to compare prices, getting the right price point is critical. If you aim too high, you're likely to put off potential customers. But equally, if you price too low, you risk portraying your product as cheap and damaging your brand.

Use your internal costing data combined with the current market demand, the perception of your brand, competitor pricing, volumes of supply and other market data to arrive at the optimal price for each product.

Don't send customers away to your competition. Constantly refresh and review your pricing strategies. To find out more about how Skuuudle can help you stay on top of your price points and ahead of the competition, please get in touch.

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