We know you spend a considerable amount of your valuable time to learn about the business strategies that can improve your business. That’s why you love our blog. Pricing strategy is a cornerstone of a successful business, and you have to learn about and try out different pricing strategies.
When you’re reading business blogs to find the pricing strategy that best fits your business, you often come across to a term, price point. You wonder, what’s the difference between price point and price?
In this blog post, we’ll learn what differentiates the two terms so that there is no room for confusion.
Let’s begin with their definitions.
What is price
Price is the monetary value of a good or service.
This product’s price is £38.95 on Amazon. It is the actual amount of money one needs to give up to obtain this product.
What is a price point
Price point is a point on a scale of possible prices for a product. Let’s understand what that means together.
Now, what exactly are you trying to achieve when you’re setting the price of a product? Your primary objective is to attract as many customers as you can.
If you sell a product for a price that is too below its market average, everyone will come to your store. But that’s not reasonable for two reasons. First, if you set a price that is too cheap, you can go bankrupt. We need to be sure that you’re covering your costs.
Moreover, you’d be leaving money on the table. Look at the top-ranked store below.
Suppose this retailer paid £180 per unit to the supplier. The owner could sell it for £200 and still make a profit. But why should she? She offers the best price, so the bargain hunters will come and look for her.
Some of these retailers certainly track competitor prices, therefore they know that their price is not the cheapest. Why do they insist on higher prices? Let’s look at the demand curve below.
Demand curve of a hypothetical product
When we look at this demand curve, we see that different prices generate different levels of demand.
Say, the cost per unit for this product is £20. If it’s sold for £25, 50 people will buy it. When it’s sold for £35, 45 people buy it. Even if more people are attracted to the cheaper price, the seller makes more profit from the second price point.
These points on the hypothetical demand curve (£20 and £25) are called price points. There are plenty of them on the curve, and they each represent a different probability. When we refer to the price point, we are actually referring to the probability. Why don’t we know the exact numbers on the curve?
The size of a product market
If we had a market economy constituted of 1000 people, we could go and ask each of them what would they be willing to pay for this product. However, in modern economies, it’s impossible to know what would each person pay for a product.
That’s why retailers test different price points on that curve to find out what the outcome will be. Sellers do not always choose to be the cheapest in the market since it may not result in the highest profit.
Now that you know the difference between price and price point, it’s helpful to have a handy way to remember the two.
All you need to keep in mind is that a price point refers to a hypothetical, potential price. For example, you might predict that you’ll be able to sell 1000 t-shirts at a £5 price point. Whereas the price is the actual price it sells or sold at.
Let’s look at some examples of price and price point used in real marketing material.
This paragraph by BigCommerce uses the phrase ‘price point’ effectively because they’re not talking about a specific price.
You’ll see that they’re trying to get you to use data to come up with a price. Because that price could vary, they use the phrase ‘price point’, rather than simply ‘price’.
In this post by Shopify, you can see that they’ve used the phrase ‘price point’ in the same way. If they would have said “Apple’s laptops cost $1999” they would have probably used the term ‘price’ seen as they’re highlighting a specific price.
However, as they’re talking about a hypothetical, potential range of prices, they use the term price point.
So what have we learned?
Well, the first thing to note is there is a very hazy line between the definitions of price and price point.
Although there are instances where the two have different meanings, there are also just as many instances where the two are used in different circumstances despite both having the same meaning.
If you do read either instance of the phrase, make sure you look closely as to the context in which it was used to ascertain it’s meaning.
As an e-commerce owner, it’s vital for you to fully grasp the difference between the two concepts. It’s a fundamental knowledge highly valued in the business circles, and not knowing what it is can damage your prestige.