Last updated: January 2, 2023
As much as every business owner would like to differentiate themselves by having the most innovative or valuable offering on the market, there’s one other factor you can’t afford to ignore: Price. Around 60% of ecommerce customers consider price as one of the most critical factors in purchasing decisions — and this rises further during times of economic difficulties. There’s never been a better time to analyze your price points to maximize revenue.
At Upscribe, we know that nothing is more critical for Shopify store owners than keeping their customers around, so we provide tools to help them do precisely that by scaling subscriptions. We know firsthand how vital prices are in this jigsaw, so let’s explore what price points are, their benefits, and how to use them.
What are price points?
A price point (PP) is a hypothetical selling price — a possible price you could assign to your goods and services, but not necessarily the final selling price.
In turn, price point analysis helps companies determine their final selling price. This should be a number that allows them to generate maximum profit while remaining attractive to consumers.
A closely linked concept is price thresholds: The maximum acceptable price a customer will pay before turning to one of your competitors.
Think of it like this. You need to choose your final retail price from a scale of potential prices — your challenge is figuring out where on that scale your optimum price lies. Go too high and you will cross the price threshold of your customers, resulting in lower sales and profits. But go too low, and your profits could take a significant hit, making your business model redundant.
How do you know what the right price is? We’ll get to that shortly.
Example of price points
First, let’s look at how price points work in practice.
This comes down to a cornerstone concept in economics: When prices are lower, consumers demand more (and vice versa). Businesses therefore have a “bundle” of prices to choose between, which involve different demand levels.
In the example below, when the price of an item is $5, there is consumer demand for 100 units. Meanwhile, when the price is $1, consumers demand 500 units.
At the higher price levels, those 400 customers (who would have bought the item for $1) may turn to competitors with lower prices or go without the item altogether. To determine the right price, a company needs to know how its costs compare at each level of quantity demanded and what would allow it to obtain the highest profits.
Price points vs price
Price points and prices might sound like the same concept at first, and in many cases, the terms are used interchangeably.
However, there’s an important distinction. A price is the final retail or selling price — the price a customer pays when they purchase an item. Meanwhile, a price point is a possible price a company is considering.
A product can only have one selling price at any given moment, but it may have numerous price points.
Benefits of price point analysis
We’ve dived deep with the technicalities, so it’s easy to miss the bigger picture. Why bother with analyzing your price points in the first place?
It makes you competitive
Carrying out price point analysis and choosing the right selling prices is all about helping you to maintain or build your market share, grow your business, and generate more revenue. What could be more important than that?
It benefits customers
Pricing defines what your products are worth to customers. Like it or not, humans tend to use dollar symbols to value just about anything.
Choose a price too low, and customers may become suspicious or assume you’re offering poor quality. Yet if you choose a price that’s much higher than average, you’ll need to put the work in to prove you’re worth that value.
It affects a consumer’s views of a product or service
Customers are often aware of what standard prices are in a given market or industry, and they get used to paying whatever lines up with the norm. If your prices rise above that, your customers may feel they’re being taken advantage of and turn against you.
Getting price points right allows you to boost your customer retention, which is crucial for your revenue.
How to set a price point
In an ideal world, you’d be able to derive a demand curve like the one we showed above which would reflect exactly how your customers would respond to different prices. Yet in reality, this would be practically impossible — instead, all you can do is make an estimation.
Step 1: Calculate your goals
First, you need to consider how different prices and quantities of goods sold could affect your business model and cost-effectiveness.
What’s the lowest price you could charge for your product while remaining profitable?
Is there a certain number of units at which you can maximize your revenue without spending more money on your operations and logistics? What’s the tipping point at which you’ll need to invest a lot more to sell that quantity?
Once you have a minimum price (and possibly a maximum quantity) established, you can move on to thinking about broader factors related to your customers and market.
Step 2: Study the market
There are a lot of factors that play a role in how customers will respond to price changes.
Some of these include:
- Competitor prices. The lower these are, the more price-sensitive your customers are likely to be. Generally, you shouldn’t choose a price significantly higher or lower than the average for your industry.
- How customers view you compared to your competitors (e.g., branding). You may want to conduct surveys with your customers or monitor your social media to understand price perception, how loyal your customers are, and how dominant you are in your market.
- The price sensitivity of your market. If you sell luxury goods and not basic necessities, you can generally expect greater price sensitivity.
Combining all of this with the information from the previous step (the minimum price and maximum quantity for a product), you should be able to come up with a reference price point (RPP). This represents a price that would be appropriate for your customers, in line with your market, and makes sense for business.
However, don’t just assume that you will identify the perfect number first time around — you may need to make some adjustments over time.
Step 3: Carry out tests
Up to this point, the exercises have been purely hypothetical. But it’s highly unlikely that you’ll be able to suss your market and customers out perfectly based on theory and guessing alone.
That’s why you need to test your assumptions through testing too.
A simple example would be a basic A/B test, where A represents your original price and B represents a different price point. How does the number of sales you get change when you move a price from A to B?
Or, you could gradually increase prices over time to see at what point sales drop significantly.
Naturally, this could turn away loyal customers, so it’s better to experiment with new leads instead. For instance, you could carry out a Facebook advertising campaign for your Shopify store that contains two sets of prices, and see which one gets the most conversions. Automated solutions can make this process easier.
Step 4: Monitor your pricing
Even after you’ve decided on a selling price that seems reasonable, you can’t assume it will remain reasonable forever — market conditions change, and inflation happens.
Aim to monitor prices (and your profitability) on a monthly basis to ensure your numbers are still optimal.
You may also want to monitor competitor prices, which can help you anticipate market trends ahead of time.
If you’re struggling to remain profitable, you may be interested in exploring alternative pricing strategies, such as product bundling (selling items together for a discount) or offering subscriptions (products purchased on a recurring basis). Both options encourage customers to buy a larger quantity of items for a lower selling price per unit, which can be another way to ensure you remain profitable.
Upscribe helps you to get this right for your Shopify store by delivering a great customer experience and offering options that work for your business, such as helping you pair high-demand and low-demand items together to shift stock.
Time to get to work
The process of analyzing price points is a process that involves a delicate balance between keeping customers happy and ensuring your business remains profitable. It isn’t easy — but if you’re prepared to put the work in upfront through analysis and testing, you’ll reap the benefits later down the line.
Inspired to level up your online store? Even once you get your selling price right, there are plenty of tweaks and strategies to explore. Upscribe helps you build product bundles, subscriptions, and more to offer customers more value while boosting your revenue. Sound good? Schedule your demo today.