Price Threshold - Definition & Meaning
What is 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.
Hence, this concludes the definition of Price Threshold along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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