Price Threshold 2018-11-19T13:56:33+00:00
Price Threshold

Price Threshold

The price threshold is the price point or maximum price that a customer is willing to pay. Often referred to as value based pricing where the customer value is measured customer per customer.

One of the key concepts every marketer deals with is price threshold. But before you understand what price threshold is, we want you to learn about another important concept that is deeply tied to it – price sensitivity.

Customers and their price sensitivity

As the term implies, price sensitivity is about how customers react to different prices when it comes to purchasing products. For instance, if a price of product A is $10 whereas a similar product B is $8 – customers will prefer product B. But what if product A is of better quality and offers warranty? In this case customers will not show a significant sensitivity to the $2 more price

Price threshold is what plays a pivotal role here since it’s what marketers use to influence or work with their target audience price sensitivity. So what is it?

 

 

What is price threshold?

When businesses set a price to entice customers it fixes it at a certain price point where it knows through market research and competition analysis. This price point is acceptable to the customers and they will either make the purchase or go for the next best alternative.

So knowing this, you can understand why it’s called price threshold or in some text books and other places it is known as threshold price point.  Basically it’s the threshold at which customers are most comfortable to make a purchase.

Price sensitivity is important for businesses since they don’t want to shun away potential customers. Which is why they use price thresholds like $5.99 or $999 to ensure customers pay attention to their products.

While there is little to no difference between $6 and $5.99 or $1000 and $999, customers tend to hooked that a certain price is less compared to the next best alternative.

Price Threshold with iPhone X

Last year Apple unveiled its new iPhone X which was priced at $999.

This in our opinion is one of the best example of a company flirting with the price sensitivity of its customers.  IPhone users have paid at most usually $800 for a new phone but with the one launched in 2017, customers were in completely different ball game.

But Apple knew that they could charge more and thereby increased the price threshold since they were offering a completely new model, new features and the fact the phone could be easily be unlocked through Face ID – a never before feature in iPhones. Meaning, they were cashing on latest upgrades of the phone.

Now that you know what price threshold is, let’s look into different scenarios where you will work with it.

 

 

Increasing the price of your products:

Now let’s talk about increasing the price of your products.

Businesses need to increase their prices for variety of reasons. Increase in costs, adding in more features or services, offering better quality and many other reasons can push a business to increase their costs.

This is where price threshold becomes imperative. Why? Because you don’t want to lose your customers when they see a price hike. They have adjusted themselves to a price they are willing to spend.

So to increase the price, there are variety of ways a business can use to do it without shunning its customers.

Tweak the product

If you need to increase your product price the best strategy you can go for would be to add in more features.

Consider our previous iPhone X example. Apple always try to bring something new to the table. Whether it’s a new chip or a new feature like animoji, Apple tries to sell its iPhones always by saying, “This is the best iPhone they have made”.   Why do they do this?

They want to increase their prices. And since they have offered new features, they are justifying themselves for the new price. This assuages customers that they are not being swindled and they can make up their minds easily.

Another example would be of restaurants. You would have noticed sometimes that your favorite dish has smaller serving yet the price is the same. This is another way through which businesses raise prices, they reduce the quantity of the product yet keep the price same to enjoy more profits. Through this method, customers don’t realize the new price or simply don’t worry too much.

Pair it with a special

Another way through which you can soften the blow of a new price threshold would be to run a special promotion.

Often you see Uber offering discounts to its customers before it increases its price. This is another traditional way to increase prices.

Customers are incredible price conscious when it comes to products and services they use every day like Uber.

This is why this strategy works since it offers discounts and special prices first. After sometime when it’s time to return back to the original prices, a business can raise the price a little bit more.

 

 

Taking it slow and steady

One of the best strategies through which businesses raise the price thresholds is increasing their prices gradually. To get an idea, consider the table below:

The table shows a gradual increase in prices over a year. Every quarter, the price of the product is increased $5. What this means is that customers will see an increase the price but it wouldn’t test their sensitivity.

MonthPrice
January$15
April$20
July$25
October$30

This type of pricing is often seen in businesses offering services to their customers. For instance, a barber shop will increase its price like this so that its regular customers don’t leave.

Some companies like Microsoft and Sony plan for pricing changes that can last over many years. Through this, they keep adding more features in their products whereas increase the prices simultaneously.

 

 

How can we help?

When it comes to price thresholds, businesses cannot afford to take a chance. For them it is imperative that they price their products sensibly or risk losing their customers.

If you are interested to learn more about price points, do read what we have to say about them here:

And if you want to really start managing your prices, please contact us.

Strategy card

Strategic importance (retail) 89
Strategic importance (ecommerce) 89
Ease of use 79
Practical implementation 81