Definition: A price point is a competitive price often suggested by the manufacturer or recognized after observing supply and demand interactions. It is the price at which consumers are still attracted to the product if a comparison with the competition takes place.
What Does Price Point Mean?
Price points are often calculated not as a financial equation but from an economic perspective. To set a price point there are various elements companies should look out for, like quantities demanded, quantities supplied, substitute product’s prices, and gross margin per unit. As the laws of supply and demand state, if prices are increased, quantities demanded should decrease and, quantities supplied should increase.
Nevertheless, if there is no competition, prices can go as high as the company wants, since there are no other choices and, on the other hand, if there is too much competition and there are too many substitutes around, increasing the price point might reduce the number of items sold dramatically. This is the reason why companies should study the market carefully to set an adequate price point that takes into account all these factors in order to remain competitive.
Manufacturers normally have a suggested price point they establish for its retailers, nonetheless, depending on the scenario of each of them, they might decide to reduce or increase the price point to achieve specific goals.
Example
Louis is the owner of a small barber shop. He normally serves men that live close to the shop and he is well known within the neighborhood. Recently, a new barber shop opened five blocks ahead and Louis is concerned that it might causes him to lose clientele. He charges $20 for a regular man haircut and he heard that the new barber will charge $15.
Louis knows that his price point is higher but since he has many years operating in the neighborhood he knows the demand very well and he calculated that the lowest price he can charge per haircut to stay profitable is $19. After doing this math, he felt comfortable that the new shop will eventually raise its prices, when they come to understand this, so he didn’t changed his. As he predicted, after two months in business the new barber shop raised its prices to $25 per haircut, making Louis’ price point the most competitive one.
