Everyone knows that at a certain price point, a product or service can easily be sold to the consumers since they find it affordable.
Whether it’s an everyday item like sugar or a high end product like the latest iPhone, customers want to buy products and services at a cost that they like.
For businesses, this is what concept of price point is.
Economists and business owners are both interested in price points. It is defined as the price where the demand of a product will stay high. If a business doesn’t properly plan its price, it will see the demand of its product go down.
For instance, if a manufacturer increases the cost of its water bottles by $10 which were originally being sold for $5, customers will start to look for cheaper ones.
Pricing can be tricky
When we talk about pricing it is important to understand that it is not an exact science. There are variety of things to consider when it comes to setting a price as there are many factors that can influence your product and its sales. Businesses sometimes spend many months before they come to a right price.
Businesses tend to set prices based on different factors:
- Data on how much customers are willing to pay for their products and services.
- How the business, its brand and products are perceived by customers.
- Data about competition pricing strategy (what they are charging, sales and discounts they are offering).
- Is the product or service highly visible in the market? Whether it is used in comparison or shopped frequently by customers.
- The volume of product that the business can easily sell.
It important to bear in mind that the concept of price points is about consumer psychology. Think about the usual way marketers use odd pricing like $14.99 or $699. They are not rounded to numbers like $15 or $700. The reason is that a rounded off number becomes a barrier since it looks bigger in consumers’ minds whereas a number like $14.99 showcases a smaller amount of money.
This brings us to two very important concepts – underpricing and overpricing.
When businesses price their products too low they can suffer quite a bit. If you price your products low, you are going to get low profits – its simple math. Even if the business is operating in a down economy, it has to take a loss using underpricing strategy.
The goal is to assure consumers that when they buy from you, they are getting a good deal. Consumers always want more value for less money. So a business must carefully come up with a price point that will not cause it to lose profits, but on the other hand takes care of the customers.
Contrary to underpricing, overpricing is a strategy used by businesses where they overcharge of their products.
This too can have disastrous effect on their sales since consumers have the ability to choose another product. Your competitors are constantly analyzing your pricing trends, and if they see an increase in your price, they usually attract more customers.
How do you use price points?
When it comes to setting prices, companies need to consider different factors. Number one is maximizing profits. But companies are also focusing on increasing their market share using prices. How? They can do it by decreasing costs of producing their products and then decreasing their prices.
By doing so you will gain an edge over your competitors since consumers will prefer your product due to its affordability. This increase the use of the product triggering what is known as network effect.
Network effect is defined as a situation where a product’s increased use by consumers helps in improving its value. A good example would be of iPhone. When the first touch screen phone was revealed by Apple not many were enthusiastic to use a phone with one side completely made with a display screen. But as time passed, more and more customers bought the phone and today it is one of the most sought after phones in the market.
Increasing prices strategically
Another way to use price points is to increase prices strategically without losing demand.
Known also as rising price model, companies can increase prices gradually to ensure they find the ultimate price where they can earn more without losing their customers.
Gradually raising prices works for businesses since they are able to easily sell their products in larger quantity efficiently. This technique is actually perfect for sellers that are not aware what their ideal price point is and what their profit margin can be.
For instance a new company that has entered the market is afraid to charge too much since it wants to attract customers but it also wants to make a profit. Let’s say a new company that wants to sell a bicycle will start the price at $50. Once it starts getting orders, it can then increase the price to $75 and see how customers react. If the demand is still high, the same company can increase its prices further, till the demand stays high.
Increasing prices strategically can be effective for variety of reasons.
- It helps newcomers in the market to easily find their perfect price point.
- It helps businesses to understand what their customer preferences are when it comes to prices, value and choice.
- By increasing prices, a business can create a better brand image and create triggers for more purchases.
Price points serve as a barometer for businesses to understand what price their customers really want.
It all boils down to knowing your product and its benefits along with what your customers are looking for. To ensure you survive in market, you need to price your product to ensure a healthy profit margin while retaining customers. Setting the right price can be the difference between your business success and failure.