Price Point

A price point (PP) is a selling price that a manufacturer or retailer recommends for its product or service to remain competitive in the market while also making a profit. Usually, it considers the demand and supply, the competition, and alternatives to a product or service.

The seller can optimize profitability by deciding the possible price for a specific product or service. Doing so will also ensure that the demand remains significantly high. It also gives the customer the impression that the pricing is fair. Since market conditions adjust the PP, the business must devote a significant amount of time and effort to analyzing the variables, including profit margin.

• A price point is a single hypothetical point among different possible prices suggested for a product or service, with some yielding higher profits.
• Generally, it is derived by observing the interaction between the demand and supply curve. It helps the company in determining the possible profit margin for its product or service.
• While it is often used synonymously with price in daily life, a manufacturer or retailer looking to price a product or service in the market should be able to differentiate between the two.

The price point refers to the careful observation of market variables to define the selling price. Several factors contribute to determining the price of a good or service. Likewise, the price determined can affect profits. The demand and supply of a particular product or service remain proportional to the price. Any change in either side brings the opposite effect on the other side. Similarly, the competition and availability of substitute products play a crucial role in deciding the market price.

Let us consider a hypothetical demand curve depicting the expected demand of a product at a particular price.

According to economic theory, when a product's price rises, the quantity demanded decreases. Point A is a PP in the graph above. It indicates that at the cost of 7, the quantity demanded stays at 10. Another PP is Point B, which shows that if the price reduces from 7 to 6, the amount required can increase to 20. Therefore, a business must consider keeping costs low rather than too high to profit from supply volume.

After learning about what is a price point, it is time to understand how to achieve it effectively. Here, the manufacturer or retailer must understand that pricing makes the market competitive. And since pricing is fluid, the pricing strategy should be based on multiple metrics. Market research, unique selling proposition, and competition are to name a few.

Given the enormous market size, it is almost impossible for manufacturers to derive a demand curve like the one above. In a real-world situation, here are a few tried-and-true solutions to this problem.

1. Study the market carefully and consider all the input factors beforehand to arrive at a reference price point (RPP)
2. Then, try different prices adjacent to the RPP to check at what point they can achieve higher profits while remaining competitive in the market
3. Constantly monitor the optimal PP in response to the change in the prices of the product or service offered by the competitors
4. Never choose a PP that is either too high or too low than the average market price of the product
5. Know that choosing a high PP might result in loss of customers, whereas keeping it low might end up in revenue loss or missing out on additional profits

PP enables businesses to set thresholds or barriers while pricing a product or service. For example, marketers may check for certain PP thresholds to divide the market into various segments. After which, the item could be considered exclusive, and only luxury customers would be the target audience.

For an example, let us consider the case of a five-star hotel aiming to boost its profits:

1. The hotel already knows that its average input cost for one room per day after taking all variables into account is $3,000.
2. Currently, the hotel charges an average of $5,000 per day for one room. At this price, the hotels attract about 50 guests per day on average.
3. Lowering the cost to, say, $4,500 could increase the number of guests to 60, resulting in increased income for the hotel.
4. Lowering rates, on the other hand, does not necessarily imply higher earnings. In this situation, the hotel does not want to reduce the price below $4,000 because it wants to retain its prestige tag to attract premium guests.

People sometimes mistakenly believe that the PP and the price are the same things. As such, these terms are often used interchangeably. It is generally because both have an almost indistinguishable line separating them.

As the preceding price point example shows, there are several situations in which these two terms may have different meanings depending on their usage.

The price point definition suggests it is a conceptual point on a theoretical demand curve with multiple possible prices. On the other hand, the price is the actual sum quoted/demanded of a product or service. In simpler words, the PP is the potential selling price of goods or services, whereas the price is the actual selling price of that goods or service.

This has been a guide to Price Point and its Meaning. Here we discuss how does it work along with an example and how it is different from the price. You can learn more from the following articles -

• Psychological Pricing
• Prestige Pricing
• Loss Leader Pricing