Price Point

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Meaning Of Price Point

A price point (PP) is a selling price that a manufacturer or retailer recommends for its product or service to remain competitive in the market while also making a profit. Usually, it considers the demand and supply, the competition, and alternatives to a product or service.

The seller can optimize profitability by deciding the possible price for a specific product or service. Doing so will also ensure that the demand remains significantly high. It also gives the customer the impression that the pricing is fair. Since market conditions adjust the PP, the business must devote a significant amount of time and effort to analyzing the variables, including profit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more.

What is Price Point?

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Key Takeaways

How Does Price Point Work?

The price point refers to the careful observation of market variables to define the selling price. Several factors contribute to determining the price of a good or service. Likewise, the price determined can affect profits. The demand and supply of a particular product or service remain proportional to the price. Any change in either side brings the opposite effect on the other side. Similarly, the competition and availability of substitute productsSubstitute ProductsAny alternative, replacement, or backup of a primary product in the market is referred to as a substitute product. It refers to any commodity or combination of goods that might be used in place of a more popular item in normal circumstances without affecting the composition, appearance, or more play a crucial role in deciding the market price.

Let us consider a hypothetical demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things more depicting the expected demand of a product at a particular price.

Hypothetical demand curve for Price Point

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According to economic theory, when a product’s price rises, the quantity demanded decreases. Point A is a PP in the graph above. It indicates that at the cost of 7, the quantity demanded stays at 10. Another PP is Point B, which shows that if the price reduces from 7 to 6, the amount required can increase to 20. Therefore, a business must consider keeping costs low rather than too high to profit from supply volume.

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How To Set A Price Point?

After learning about what is a price point, it is time to understand how to achieve it effectively. Here, the manufacturer or retailer must understand that pricing makes the market competitive. And since pricing is fluid, the pricing strategy should be based on multiple metrics. Market research, unique selling propositionUnique Selling PropositionThe full form of USP is a unique selling proposition. It is the unique characteristic of the product or services of the company that conveys or highlights the benefit of customers along with differentiating the company from its competitors in the market, providing it with an added advantage and this USP should be communicated properly to the customers in order to take its full more, and competition are to name a few.

Price Point Determinants

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Given the enormous market size, it is almost impossible for manufacturers to derive a demand curve like the one above. In a real-world situation, here are a few tried-and-true solutions to this problem.

  1. Study the market carefully and consider all the input factors beforehand to arrive at a reference price point (RPP)
  2. Then, try different prices adjacent to the RPP to check at what point they can achieve higher profits while remaining competitive in the market
  3. Constantly monitor the optimal PP in response to the change in the prices of the product or service offered by the competitors
  4. Never choose a PP that is either too high or too low than the average market price of the product
  5. Know that choosing a high PP might result in loss of customers, whereas keeping it low might end up in revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any more loss or missing out on additional profits

Significance Of Price Point

PP enables businesses to set thresholds or barriers while pricing a product or service. For example, marketers may check for certain PP thresholds to divide the market into various segments. After which, the item could be considered exclusive, and only luxury customers would be the target audience.

Price Point Example

For an example, let us consider the case of a five-star hotel aiming to boost its profits:

  1. The hotel already knows that its average input cost for one room per day after taking all variables into account is $3,000.
  2. Currently, the hotel charges an average of $5,000 per day for one room. At this price, the hotels attract about 50 guests per day on average.
  3. Lowering the cost to, say, $4,500 could increase the number of guests to 60, resulting in increased income for the hotel.
  4. Lowering rates, on the other hand, does not necessarily imply higher earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other more. In this situation, the hotel does not want to reduce the price below $4,000 because it wants to retain its prestige tag to attract premium guests.

Is Price Point Different From Price?

People sometimes mistakenly believe that the PP and the price are the same things. As such, these terms are often used interchangeably. It is generally because both have an almost indistinguishable line separating them.

As the preceding price point example shows, there are several situations in which these two terms may have different meanings depending on their usage.

The price point definition suggests it is a conceptual point on a theoretical demand curve with multiple possible prices. On the other hand, the price is the actual sum quoted/demanded of a product or service. In simpler words, the PP is the potential selling price of goods or services, whereas the price is the actual selling price of that goods or service.

Frequently Asked Questions (FAQs)

What does price point mean?

A price point is a suggested selling price for a product or service defined by a manufacturer or retailer to remain competitive in the market while generating a profit. It usually evaluates demand and supply, competition, and alternatives to a product or service.

How to determine price point?

The business must dedicate a significant amount of time and effort to analyze market conditions and variables when modifying the price point (PP), including profit margin. Multiple factors, such as market research, unique selling point, and competition, can help determine the best profitable price for a product or service.

What is the difference between price point and price?

People sometimes confuse the pricing point (PP) with the price. However, these two terms can have various connotations depending on the context. A PP is a single conceptual point on a theoretical demand curve with multiple price options. The price, on the other hand, is the actual amount charged for a product or service. Simply put, the PP is the prospective selling price of products or services, whereas the price is the actual selling price.

This has been a guide to Price Point and its Meaning. Here we discuss how does it work along with an example and how it is different from the price. You can learn more from the following articles –

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