What is a Price Point?

A price point is the suggested retail price of a product or service. It is usually set in relation to the prices at which goods and services are being offered by competitors, or at the prices associated with substitute products. An ideal price point should maximize profitability for the seller. To find this optimal point, a seller runs tests at various price points to see which one generates the largest aggregate profit level. This price point may need to be changed over time, in reaction to the prices being set by other parties for similar items.

In rare cases, increasing a price point can actually increase the number of units sold. This usually only happens when the goods sold are perceived to be extremely high-end, so that status-conscious consumers are more willing to purchase at a higher price point than at a lower one.

Example of a Price Point

Colossal Furniture produces oversized furniture for larger customers. Its sales manager is investigating the best price point for its new sectional sofa product. She estimates that sales volumes would be 1,000 units at a price point of $500, generating a profit of $40 per unit, or $40,000 in total. Alternatively, she can raise the price point to $700, where she expects to sell only 700 units - but which will generate a total profit of $240 per unit, or $168,000 in total. Obviously, she opts for the higher price point, since it results in four times the total profit being generated.