What is a price point?
A price point is a specific point on a spectrum of possible prices for a product or service. The difference between the terms price and price point is that price refers to a specific price rate, whereas price points are points within a spectrum of possible prices. Retailers set different product price points to optimize their sales based on demand, wholesale and inflation rates, and brand image.
How should you decide on product price points?
When assigning price points to products as a retailer, there are a few things to consider first. How can you maximize the number of sales? What is the secret to standing out amongst your competitors? The following are methods we recommend when deciding price points for e-commerce retail.
Product and market research
- Assessing the market of wholesale prices of products and/or materials that your business uses can help you determine which source can give you the best value for your money.
- Figuring out a range of viable price points (maximum, minimum) to abide by gives you boundaries based on what suits the financial state of your business, and you can alter them over time if needed.
- What does your brand stand for? Does your brand specialize in budget products or higher-end? A budget grocery store would aim to make products as cheap as possible for customers after factoring in all costs and profit margins. In contrast, a brand more focused on sustainable, naturally produced, fancy soaps may use higher price points to stay true to their brand by including ethical and social responsibility in their branding, for example, offsetting carbon emissions for every purchase.
- A study by Acierto.com in 2020 found that 93% of online customers compare the prices of a product several times before making a purchase. Comparing price points with your competition gives you insight into how you can place yourself in an ideal position to be chosen by customers over your competitors. Competitive price monitoring and dynamic repricing are tools designed specifically for retailers to stand out amongst their competitors regarding price points.
- Assessing customer demand plays a massive part in pricing your products. If you sell a product that is high in demand, it may be wise to raise the price point as people are usually willing to spend a lot more to bag it before it sells out everywhere.
The human behavior of buying
As humans, we have a thought process when buying a product that enables us to justify a purchase before checking out. When building your selling experience, it’s helpful to put yourself in the shoes of your potential clients.
When a shopper sees two listings of the same headphones next to each other, but one of them has an extra case for no added cost, most will prioritize the listing with the freebie as it gives the impression of being a good deal. However, the ‘good deal’ is a premeditated reference pricing strategy intending to attract more buyers by simply showcasing the comparison to shoppers. This same strategy is in action when retailers display a pre-sale price next to a shiny sale price, so customers perceive that they are lucky to have found the deal.
Another strategy is price anchoring, which includes presenting different options for a product or service at a spectrum of price points. For example, when a streaming service offers three types of user subscriptions, Basic, Plus, and Premium, it’s often the case that the middle price is the true sales price of the service and the other two function as anchor prices. This technique gives clients a guide to different levels and features of a product and the perceived power to choose how much they are willing to spend. The way that the plan prices and features offered compare to each other side-by-side is crucial to a client’s decision-making process as it requires them to decide where their needs and wants fall on the spectrum of price points.
Test and try
No matter your pricing strategy, you will often need to test and try your prices and closely monitor how customers respond to them. After making changes to your prices you can check the success rate based on questions including:
- Did your customer retention rate change?
- Are you happy with the profit rates of sales (ROI)?
- Are your customers choosing competitors over you?
Pricing shouldn’t stay the same forever
With fluctuating market activity and rising inflation rates, there should be no reason for products to stay the same price forever from the day that they are launched. The value of items and wholesale prices change over time, and if retailers aren’t reacting to these socioeconomic changes, their outdated pricing may be missing out on new opportunities.
Pricing strategies
Each retailer uses one or multiple pricing strategies to attract and retain clients and reach their sales targets. The following are some of the most popular techniques that businesses currently follow.
Summary
To conclude, The premise of price points is product prices on a spectrum that are strategically chosen to attract more sales. Retail product price point strategies aimed at attracting and retaining clients are determined through product and market research. Your pricing strategy depends on factors including your brand’s image, marketing, competition, demand, and wholesale costs.
Pricing strategies include competition-based, customer-based, demand-based, and cost-based methods. Competition-based strategies, including discount and dynamic pricing, monitor competitors’ pricing and use the data to inform more price points that aim to be more attractive than them. Retailers and e-commerce sellers can use competitor price monitoring, such as DataSearch, to quickly and efficiently track and react to competitor price points. Demand-based strategies base their price points on how the demand for a product impacts the amount of money that customers are willing to spend over time. Cost-based strategies focus purely on the true costs of a product’s wholesale/material/overhead costs and add a markup percentage rate for profit. Customer-based strategies consider how much people perceive a product’s price. Retailers can use one or more of the mentioned pricing strategies to optimize sales and client retention rates.
You can also use strategies that organically change how clients perceive prices by changing how you present them on a webpage. Reference pricing and price anchoring show visual references, such as pre-sale prices, to clients to give the perception of free choice and good deals to attract more sales.
Even after implementing product pricing strategies, we recommend testing and closely monitoring any price changes to see how consumers react. Price points should also change over time depending on demand and socioeconomic factors such as inflation and wholesale costs.