What is the price index and how is it calculated?

What is the price index and how is it calculated?

12/16/2020 - Pricing strategy

The price index is the figure that shows the differences between the situation your eCommerce business is in and that of your online competitors. And what can you use this for? To recognise which competitors are taking over your market territory and under which conditions. We’ll tell you how to calculate the price index to optimise your eCommerce pricing strategy.

What’s your business’s price index?

The price index is the value that separates your pricing strategy from that of the competition. It helps you check if you’re on the right track in terms of the sales evolution taking place.

As such, the price index is a value that’s used by programmers and price and development managers to know the state of the business and create an optimisation plan for each sales channel.

How to calculate the price index of your sector

We speak of identifying the price index of your sector and not of your business since the idea is to establish this as a standard that your pricing strategy will fluctuate around.

To calculate the price index, you need to find the relationship between the price your competitor is selling at and the price you’re charging for the same product. When applied to the catalogue, this will be the average price of all products based on the total number of products that you have in your catalogue. In terms of the result:

  • the closer it is to 1, the better you match your competition.
  • if the result is much lower than 1, your competition is selling at prices much lower than yours.
  • if, on the other hand, you get a result that is much higher than 1, you’re selling at prices that are lower than the market and, perhaps, you could optimise your promotions or the other prices that you’re using.
Price Index

How can the price index interfere with your pricing strategy?

The main objective of the price index is to find the direct relationship between the prices for the same product. However, as we’ve seen, it can also be applied to an entire catalogue to find out where your business stands in terms of the competition.

But, how can you draw simple conclusions regarding its impact on sales? Very easily: by studying the relationship between the price fluctuations of all those analysed and the sales volume. You’ll be able to obtain very valuable data on how well they anticipate market demand.

To obtain this organised and recurrent information, it’s important for you to have the necessary tools to extract the data and for its subsequent management and analysis. A pricing tool is the perfect resource that will allow you to do all three in a centralised way. Parameterise the comparative study with the competition that you choose, select the values that you’re interested in, and programme matching actions when the milestones you’ve set occur.

Thanks to the price index, these three elements will be those that allow you to take your pricing strategy to the next level. This is how you’ll be able to achieve optimal functioning of your online store, based on the visits that you receive, your success rate in terms of sales, and improve the profits you earn on each of them.

Category: Pricing strategy

Tags: ecommerce, pricing

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Angela
Angela de la Vieja
Content Manager

The first dynamic pricing solution designed by and for retailers