What is Optimal Price?

The optimal price is that price point at which the total profit of the seller is maximized. When the price is too low, the seller is moving a large number of units but is not earning the highest possible aggregate profit. When the price is too high, the seller is moving too few units at a high margin per unit, and so achieves a lesser total profit figure. The optimal price is typically found through trial and error, to see which price point will result in the ideal unit quantity being sold.

It is possible that the optimal price for a product is different, depending on the market in which it is sold. For example, a business might maximize the sale of a green widget in the United States at a price of $10, but would struggle to sell it for the same price in Africa, where customers are more price-sensitive. In the latter market, the optimal price might be substantially lower than in the firm’s main American market.

Problems with Optimal Pricing

A problem with the optimal price concept is that its sole focus is profit maximization. A company could instead lower its prices in order to gain market share, thereby driving competitors out of the market. Conversely, if a seller knew that lower-priced competitors were about to enter the market, it could charge very high prices in order to maximize its profits in the short term, and then cede the market to the new entrants.