A price point is a retail selling price that is directly below a round number (e.g. 2.99 EUR). The price point is therefore a special, fixed sales price to achieve a sales-promoting effect. This is because a price that is just below the round price is considered particularly favourable by your customers. Through this price fixing you achieve a comparatively high sales volume with a small reduction compared to the round prices just above or the prices determined by the sales price calculation.
In retail and trade, price points are often used which are immediately below a round figure (e.g. EUR 1.99). It is assumed that such prices have a sales-promoting effect. Wholesalers, on the other hand, often favour smooth prices.brainbi definition of price point and the usage in retail and trade
In sales price calculations, price points are used as rounding targets. For example, a price calculated from plan data could be rounded up from 1.92 EUR to 1.99 EUR.
How do you determine the correct price points on the basis of your sales price calculation?
With the help of a special price point rounding you determine how the result of your sales price calculation is standardized to a certain price point by rounding up or down. By defining price point ranges, you can group the articles together in a price point group. You must define a lower and an upper price point for all price point areas. You determine the price point by permanently adding a deinierter price point increment.
Price point calculation example for retail trade
For example, you define the following price point range for merchandise category beer in the price range 1.99 to 5.99 EUR (sales price calculation):
- Lower price point: 1.99
- Upper corner price: 5,99
- Price point increment: 0.20
Adding the price point increment results in the following price points for this price point range:
When rounding off, in particular the corner article in the trade, from for example arithmetically 1.01 euro to then 0.99 euro, the question arises, who pays the difference of two per cent. With a return on sales for German retailers of one to two percent, the pressure on the industry will certainly increase further. Will the trade demand a Euro bonus or will there be the much-cited cooperation between industry and trade in the sense of Efficient Consumer Response (ECR), which looks for an optimal path for all participants on the basis of consumer information?
Market information is important
The prerequisite for this is “correct” market information. It is important for manufacturers to determine their position. The question for the manufacturer is first: “How strongly am I represented with my brand at which relevant price thresholds, both in the normal offer and in the promotion, and what is the positioning of my competitors?”
To what extent do certain offers, for example 100g bar chocolate for 99 pfennigs, go out of the price range and could thus become less interesting for the trade from a promotional point of view, while other categories become more promotionally attractive? Maybe that will be the 200g chocolate bar?
Could the change in packaging contents or innovations be an alternative solution in certain cases?
Ultimately, all possible strategies for living with the euro must be geared to consumer behaviour and reactions. GfK Panel Services, which is part of GfK’s Consumer Tracking division, collects all purchases and prices for all markets and brands in the representative ConsumerScan and ConsumerScope consumer panels. On the basis of this data, various evaluations of consumer behavior can be derived with regard to price categories, price thresholds and thus price-sales functions.
smooth vs. odd prices
Every day, price tags light up with nines in the decimal places. The trade is expecting higher sales, because – so the common assumption – $ 49.99 have a bargain character in contrast to $ 50.99 and are intended to tempt the customer to take hold. A new study has now investigated whether this classic marketing trick is overrated and whether consumers may still value round figures.
This assumption is based on the data available from the experimental evaluation of innovative pricing strategies such as pay-what-you-want models. For example, the video game “The World of Goo” mentioned in the introduction: Users could determine the price themselves when downloading it. More than 65,000 buyers from 104 countries paid between one penny and 150 US dollars. A total of 57 percent of all buyers opted for round amounts that ended with a zero. Another four percent chose round amounts with a five at the end.
In the experiment, 9,000 tips were now evaluated in a restaurant: 73 percent of the guests had rounded up to ten amounts when rewarding the service, another eight percent to five sums.
The behaviour at self-service petrol stations was also investigated. The magazine strategy+business added:
We all know that singular flash of frustration that comes from failing to stop the pump at precisely the right moment to arrive at an even $40. Sure enough, another 7 percent of the sales totals in the study ended in .01—this implies that people wanted to pay a round number, but their reflexes just weren’t fast enough to stop the pump on time.strategy+business
- Turning away from prices like $99.99 can certainly make sense, because people find it much easier to compare round sums. In addition, the honesty of pricing is appreciated, as other experiments show.
- Amounts without decimal places are associated with higher quality, which can be of great importance in the financial and real estate sectors, for example.
Sources and further readings
- strategy+business, Matt Palmquist, The Psychology of Pricing: Customers Prefer Round Numbers, November 21, 2013
- Michael Lynn (Cornell University), Sean Masaki Flynn (Scripps College), and Chelsea Helion (Cornell University), Do Consumers Prefer Round Prices? Evidence from Pay-What-You-Want Decisions and Self-Pumped Gasoline Purchases, Journal of Economic Psychology, June 2013, vol. 36