Posted in Marketing and Strategy Terms, Total Reads: 752
Definition: Price Threshold
Price Threshold or threshold price point is the psychological fixing of prices to attract a customer up to a certain threshold at which the buyer will be lost anyway. The most common example in India is the $x99 listing price. For example, a product may be priced at $.499. Though it is effectively $500, especially if you were to add sales tax, it will still seem cheaper to a customer psychologically than if the product were priced at $500.
If a company needs to increase the price of a product beyond the price threshold, it should only do so in incremental amounts. If a product originally cost $449, then there is apparently little difference in making the new price $499. Customers tend to notice per rupee changes less than they tend to notice changes in threshold. Thus, the company would not necessarily lose a customer upon this incremental change in the price.
As Pauwels, Srinivasan & Hans Franses noted in their study of 4 brands across 20 FMCGs, brand price elasticity was not monotonic and symmetric and threshold-based price elasticity was found for 76% of all brands. 29% reflected historical benchmark prices, 16% reflected competitive benchmark prices, and 31% reflected both types of benchmarks. The authors
demonstrated asymmetry for gains versus losses and that category characteristics influence
the extent and the nature of threshold-based price elasticity, while individual brand characteristics impact the size of the price thresholds.