The definition of price points varies but it is generally accepted that suggested retail price points are determined in such a way as to compete with prices of the same product or other products.
This is inextricably linked with competitive pricing and ultimately with profitability.
There is no “right” or “wrong” answer as to how to price items and methodologies and “magical” price points vary from retailer to retailer. For example an exclusive retailer would not use cents in their pricing. In fact they will probably round off their prices to the nearest ten dollars and so rather than have a price point of $99.99 or $99 or $95, they will have a price point of $100. On the flip side, a discount retailer will not only have price points to the cent but they may use a price structure to set them apart from competitors such as $7.88, $8,88, $9.88 and $10.88
Some retailers use a formula to arrive at their retail prices by simply multiplying by a factor of say 1.8 (80% markup) and then rounding off to the closest sensible price. Say an item costs $10.10. The retail will be $18.18. Some, but not all, retailers will round this off to $18.99 or $19 or maybe $17.99. This is arguably one of the least sensible pricing methodologies. The astute retailer will make a judgement on the retail price before even knowing the cost price. They will look at an item and say to themselves “I know I can sell that for $99”. Only then will they ask for the cost price. If the cost is say $90, you know you have a very bad deal. If the cost price is south of say $45, depending on what kind of retail you are in, you may have a good deal. If the cost is say $10, you will have an extraordinary deal.
It is important to price the item so that the customer feels that they are receiving value. This does not mean that the price needs to be low. Let’s look at a real live example – pearl stud earrings. A friend of mine used to import half drilled cultured pearls in bulk from Japan in the range of 5mm to 8mm diameter. He would send them out to a third party to have sterling silver posts glued into the half drilled pearl. Then he added a really nice presentation box – the most expensive part of the offering. All up, landed, with posts, labour and the display box the cost was less than two dollars.
Please Google a pair of 5mm cultured pearl earrings on sterling silver posts. You will probably find the price to be in the vicinity of $40 which represents a markup of around 2000%. Were you to try to sell the earrings at a margin of 80% or markup of 400%, the retail price would be $10. You would need to sell almost 5 times the volume to make the same profit, plus the customer would feel that the item was inferior.
There are numerous factors to be considered when looking at price points and these include psychological pricing i.e. where you want to position yourself, whether you want popular price points, and whether you want to be considered fair.
Each retailer needs to consider their own strategy.