The term “price point” is used in several related ways in the world of economics. All of the uses revolve around the retail price which is charged for an item, and the way in which consumers interact with this price. Some people refer specifically to the retail price as the “price point,” which is an example of a common usage of this word. Understanding how price points work is critical for companies which manufacture goods for retail sale, and for retailers who handle such products.
Ideally, a retailer wants to hit the point of perfect balance, where consumers view a price as fair and expected, and demand for a product continues to remain consistent. If a price point is too high, demand can slacken, leading to fewer units sold, and eventually pushing the margin enough that the company would have made more money at the lower price. Low prices can drive demand higher, creating profits on volume, rather than on individual items, a tactic used by bulk and discount retailers.
There are a number of things about price points which are interesting from a psychological perspective. Consumers appear to be more drawn to prices which end in odd numbers, and as many people know, prices which end in .95 or .99 tend to be viewed as more appealing. A savvy company or retailer will set a price which ends in one of these numbers rather than going for a neat, whole number, because people perceive greater savings with these prices, even if that isn't really the case.
Standardized price points are also used to avoid distracting consumers. Rather than marking things up strictly by percentage, for example, many retailers aim for a price which appeals to consumers, adding or subtracting from the markup slightly to get there. 12.99, for example, is a more appealing number than 12.37 or 13.02, just like 14.99 is perceived as more attractive than 15.00.
Researchers have also learned that changes in a price point can change the way that consumers view a product. If consumers are accustomed to paying a set amount, they will view that amount as the fair price. When the cost rises, consumers will feel like they are being taken advantage of, and they will express dissatisfaction, even if the rise is perfectly within the bounds of inflation and rising materials costs. If prices are lowered, a company will have trouble raising them back to the prior level, because consumers associate the new price point with the best and fairest value.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.