PSU Insight

Setting Your Fees and Prices

The Psychology of Price Breakpoints

Some of the techniques for determining prices that you've considered in this course are logical in nature — the cost of producing the product, how much the target market can afford to spend, that sort of thing. But choosing a price isn't just logical; there's a strong psychological component to it as well. Let's consider the concept of price breakpoints.

What's a breakpoint? Basically, a price breakpoint is a price at which a small change in price causes a big change in sales.

You see the concept of price breakpoints at work whenever you see something priced at $9.99. If the same product were priced two cents lower — $9.97 — it probably wouldn't make any difference in its sales. But price the product just two cents higher — at $10.01 — and you could quite possibly see a dramatic drop in sales.

Why? Well, if you're paying cash, you can buy a product priced at $9.99 with one ten-dollar bill. (You even get something back — a penny!) But if the item costs $10.01, you need a ten-dollar bill and a penny to buy it.

But there's more! If you're not paying cash, there's still a difference — in one case, the product is under $10, and in the other case, it's over $10. (While it's only a penny over or under $10, psychologically it makes a much bigger difference.)

And that's the idea behind price breakpoints. It's the point after which the buyer becomes much more hesitant to make the purchase. It's not logical; it's strictly psychological. But it's valid and it's something that you need to be aware of when you're setting your fees and prices.