For retailers, understanding what motivates customers and influences their purchase behavior is critical to survival.
Generally, price is one of the top factors impacting sales volume. If a retailer charges too much, demand can plummet and hurt revenue. On the other hand, charging too little means retailers risk selling at a very low or no margin.
Set a competitive price that customers consider fair so you can maintain demand and maximize profits. To do this, retailers must use price points, or how consumers respond to different prices for a product, to their advantage.
In this post, we’ll define retail price points and explore how businesses can set and optimize prices to drive growth.
What are price points?
The easiest and most common way to define a price point is to think of it as the Manufacturer’s Suggested Retail Price (MSRP).
Price point definitions are often confusing and mix price points as another word for the price, so it’s important to differentiate the two.
Price refers to the actual amount of money exchanged for a product, whereas price points are a range of prices or a curve on a pricing graph of possible prices with different demands at each price point.
But that doesn’t necessarily mean a high price point means more profits.
Remember that prices, especially online, do not exist in a vacuum, but are highly dependent on competition, so they should be dynamic. Sales volume is dictated by market conditions and revenue can change depending on an increase or decrease in supply and demand, and/or consumer interest.
Lower price points can lead to more total profits if demand is high and you capture a higher percentage of this demand.
For example, let’s say the unit cost per T-shirt is $1. Retailer A sets a price of $10 and sells 300 units whereas retailer B sets a price of $20 and sells just 100 tees.
In this case, retailer A enjoys a profit of $2700 while retailer B takes home $1900.
The above example describes an ideal market scenario. In reality, demand often fluctuates as competition, consumer preferences, and product stock all change, making it almost impossible for a retailer to stick to a single retail price for a long period of time.
Hence, having the ability to test different price points in a short time frame is valuable to capture more customers.
How should retailers determine the price?
Before we look at how to set prices, it’s important to understand a few points.
First, there is no ‘right price point’. What’s working today might not be in favor tomorrow, one week, or one month from now.
This means pricing is an ongoing process. Successful retailers are always looking for ways to increase sales and maintain healthy margins. That’s why having a competitive opening price point every day is key.
Step 1: Define your goals
As a business, your primary goal is to keep healthy sales and profits.
Before you look at a price point, ask yourself the following questions:
- Who are your customers? Are they budget-sensitive, convenience-oriented, or focused on status? For example, luxury products might have higher demand at higher price points, while price-sensitive customers might respond better to lower price points.
- What are your costs? This covers everything from unit costs to operational expenses.
- What is your competition doing? Are they changing prices often? Do they set pricing points according to MAP or MSRP?
Step 2: Study the competition
Studying what your competitors are doing is a great way to determine the starting price of a product.
What is the price they sell at? If possible, pay daily attention to your competitors through your price monitoring software or manually, so you can understand their daily prices or their prices during promotional campaigns and the changes when products go out of stock.
This should give you possible prices or a price curve to select from and a good estimate of how your consumers will behave at each point.
Step 3: Run A/B tests
Having a range of price points is a good starting point.
But you need to test different prices to better gauge which one your customers respond to.
For example, a retailer may initially set a high price point of $100 for a new jacket to see how customers react, followed by a lower price point of $50.
How does the demand change when the price is halved? Does demand double or remain static? What are the prices of the competition? These are all points retailers should keep in mind.
Experimenting with different price points like this allows businesses to make pricing decisions based on first-hand data.
Optimizing prices ㅡ analyzing retail price points for maximum profit
A/B testing is a good way to set an effective price and understand how the market responds to different price points.
But they don’t help you set the optimal price.
For that, businesses need to invest in price point analysis or a process that reveals a price that is not only attractive to customers but generates maximum profit.
One method to do this is to implement the rising price model. This dictates retailers make small price increments after selling a certain volume.
For example, let’s pretend a retailer sets an initial price of $50 for radios. Once 20 units are sold, they raise the price to $60 to see how customers react. If another 20 radios are sold, they can raise the price again.
At some point, an optimal price point or plateau will be reached where price hikes harm demand.
The rising price model can be effective for example for businesses dealing in consumables, but it might not make sense in industries like tech where innovation is constant. For example, selling a 1-year-old PC at increasing prices as time goes by usually won’t work.
Tech retailers will instead be better served by the price-skimming strategy. In this method, a retailer sets a high initial price and lowers it over time as competitors introduce alternative options or the technology becomes less relevant.
For example, when a brand like Apple launches a new Macbook, it can command a premium due to exclusivity, lack of similar options, and limited supply.
However, as technology evolves, and supply increases, the price will naturally decrease to match the market.
How to decide the price of a product is never an easy process.
But it doesn’t have to be strenuous either. Retail price points are a tool that can help businesses define a sale price that ensures maximum profit.
In today’s market, selecting an effective and competitive price point is a pivotal decision when it comes to success. Thus, having an appetite for testing and readiness to adjust to changing conditions and consumer expectations is a necessity.