Price Points for Retailers: How to choose the best product prices

Price point

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?
Price points graph

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.

  • Discount pricing (Competition based)

    Giving discounts on your products can be a great practice to attract customers and sell out a product that’s selling slowly. However, having too many discounts can alter your brand’s reputation, with people perceiving you as a low-budget, low-quality brand if your prices are always discounted. Discount pricing strategies differ across different types of brands. A brand that advertises itself as a low-price budget brand would benefit from having more discounted prices shown on its website. In contrast, a brand with medium-priced products would benefit from a smaller selection of discounted items or a “Sale” section.

    E-commerce retailers can autonomously stay up to date on their competitors’ price points by using Competitor Price Monitoring Software such as DataSearch.

  • Dynamic pricing (Competition based)

    Dynamic repricing (also known as smart repricing) uses machine learning to alter product prices according to an algorithm. A bot monitors a company’s competitor prices, compares them, and reacts by following the rules of the given algorithm (i.e., maintains retailer prices 5% cheaper than all market competitors). This allows retailers to autonomously change their prices to fit the market in the way they want.

  • Cost-plus pricing (Cost based)

    A cost-plus pricing strategy follows a straightforward formula by combining material costs, labor costs, and overhead costs with a percentage markup price. The markup price generates the profit and varies based on the retailer and product.

  • Keystone pricing (Cost based)

    Keystone pricing is a straightforward strategy where retailers sell their products at double the wholesale price that they bought them for. Essentially, this strategy is the same as cost-plus pricing, but the markup rate is always 100%.

  • Value-based pricing (Customer based)

    Value-based pricing uses clients’ perceived product value to establish its selling price. Instead of using a product’s manufacturing and labor costs, they will focus on determining how much clients are willing to pay for a product. Through solid branding and marketing, a company can charge twice as much as its competitors and still have customers willing to pay a higher price for their perceived value

  • Price penetration (Demand based)

    Penetration pricing is a strategy that initially sets a low price for a product to gain a market share and then gradually raises the cost over time once a stable client base has been established. This strategy is used by businesses that have return customers who commit to their product and won’t drift away from the brand if product prices rise. For example, streaming services Spotify and Netflix began with low-price subscription rates and then continued to raise prices over time as their user base grew exponentially. The services that Spotify and Netflix provide have become ingrained in so many users’ daily lives that they “can’t live without” them, so raising their prices does not affect their client retention rates.

  • Price skimming (Demand based)

    The price skimming strategy uses high demand to price a product/service at the highest price that clients are willing to pay initially and then lower it over time. This strategy is mainly used for innovative, high-demand products that are newly entering the market and don’t have much competition.

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.

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