A primer on magic price points — what are they, why are they important, and how can you recognize them.
In pricing, we focus on “elasticity” (how sensitive are consumers to changes in price? If we raise price by 10%, by what percentage do sales go down?) But elasticity isn’t one fixed number. To illustrate — if a gas station raises prices today by 5%, perhaps few will notice. But add another 5%, and the station across the street becomes a lot busier.
A magic price point sounds like a lot of fun, but in fact, it’s a cliff. Get close to it, and the reward is a nice view. Cross it, and your sales go crashing down. It’s no coincidence that iTunes launched songs at $.99 — below a likely $1 magic price point. You can bet that their sales would have been very different at $1.09. You can also subscribe to Pandora Plus at $4.99/month. Tidal is $9.99 or $19.99/month. See the theme?
While $1 or $10 as a key threshold may seem obvious, non-obvious magic price points abound. Consider a premium brand that raised its price by 10%. A slightly cheaper brand followed suit. The premium brand lost 75% of sales on its top selling product, and the cheaper brand saw no impact. Why? The premium brand’s increase on its top product crossed a magic price point of $4. They quickly rescinded and retrieved much of the volume. It’s difficult to know what price points are magic, because it changes dramatically by retailer and product — meaning $10 can be the magic price point for a certain size of diapers at Walmart, but inconsequential at Target, and completely meaningless in both store when you go into the dogfood aisle (all illustrative!)
Magic price points aren’t fixed — they morph. Consumer attitudes change, and they also evaluate pricing on a relative basis (i.e., compare to what’s next to it), so as competitors raise their prices, introduce new products, change package sizes, etc., these magic price points can appear, disappear, or morph.
Is the magic in you? There are numerous ways to unearth magic price points. You can use purchase data to examine the experience of competitors when they’ve raised price in the past. Or do a consumer study, testing out responses to various price points. If you don’t have the data or budget for either of those, put yourself in the shoes of your consumer. Walk down the ice cream aisle at Walmart — are most of the large tubs right under $5? Are they easy to compare (e.g., all 36 ounces?) How prominently is pricing displayed? Does it show just the dollar amount ($4.99) or also the price per ounce? Now consider the shopper — are Walmart customers very price conscious? (yes!) Are they loyal to a particular ice cream brand? (depends on the brand, and whether there is a promotion!) How much and how often do they buy (ask them!), and would they know the price without looking? If your product is in a vending machine, are buyers paying with a credit card or cash (can I buy both a soda and your company’s chips with my $2?) For an online consumer business, mimic your consumers path to purchase (how they find you) and gather the competitive price points they are likely to see / use as a reference. It also will be useful to understand which consumers are impacted by a magic price point. Perhaps charging $20 vs $19.99 would only get you half the subscribers, but the half you lost are from a demographic you know will cancel quickly or have lower value to you for other reasons.
When to jump off the cliff? Interestingly, some companies may directly target a big round price point, particularly if they want to convey quality or value. Tesla is a good example:
Select 2017 Tesla model base prices (Source: NerdWallet)
· S 75D: $79,500
· S 90D: $89,500
· S P100D: $134,500
· Model 3: $35,000
Notice while the first few models are just short of a big number (though not quite egregious as the oft-seen $19,999.99!), the Model 3 launches at a cool $35K. Tesla probably knows that many consumers will consider that a steal to get into the Tesla club, and want to highlight the quality and show confidence in the price point rather than hide it behind commas and decimals (e.g., $34,500).