If we asked you who your competitors are, would you know the answer? The answer would probably be something along the lines – companies from the same branch, that are selling similar products at a similar price. That’s correct, but not completely.
We can already see you clutching your head thinking that you have again done something wrong. But no need to worry, the only missing part of the pricing puzzle is the price index.
What is the price index and why it is exactly the catch 22 of each pricing strategy?
This post will give you the answers.
When investigating the competition, looking for similar companies can seem like a no-brainer. But, what actually makes the difference is finding companies that are offering the same products, but by using a completely different business model. Not all competitors represent the same threat. What you really want to achieve is to recognize the ones who are taking all the sales at specific times.
The price index serves to identify these competitors and create the pricing strategy that will pave the way to success. By observing the price index, you’ll be able to improve your sales and get better control of the positioning of your brand on the market.
As such, the price index is a great way of finding loopholes in your competitors’ strategy and turning them to your advantage.
This approach needs to start from 3 basic points:
Once you know all this, it’s time to calculate the price index (PI).
The formula for calculating the price index is pretty simple. All you have to do is to divide the competitors’ price with yours and multiply it by 100.
Well, if this is so simple, then why so much fuss around it?
The more complex issue is how to understand the results and how to use them in controlling your market position.
Once you know the price index for all the competitors and products you’re interested in, it would be useful to organize them in some spreadsheets/tables that will allow you to track the price changes that are mostly related to your online store.
We think that you’re starting to realize what’s the real problem here.
How to calculate so many products and competitors on a daily basis, and all by yourself?
To be honest, it’s almost impossible.
The most important thing you’ll need is a competitor price monitoring tool that will gather all this information and present it to you in a comprehensive way.
Trying to carry out all these calculations manually is not practical for any eCommerce store. Therefore, price monitoring tools will do all the daunting work for you, and what is more important, you can be sure that the data is timely and accurate. Moreover, some advanced tools such as Price2Spy offer a great level of customizability meaning that you can carry out numerous reports, all tailored to your needs.
Yes. The aim is to offer a lower price in comparison to your competitors. But, that is easier said than done. Why?
Well, it makes no sense to just drop your price randomly. A lower price will attract demand, but will it also bring profit? That’s the catch – find the balance between the set price and the profit that it brings.
For example, if a retailer tries to sell a MacBook Pro for $600 it would certainly attract a huge number of customers, alongside the lawsuit from Apple.
So, offering the lowest price is not necessarily the smarties option. Instead, you can use the price index to identify what the right price should be. By using it, you can tell that there’s probably room to set a price that’s lower than PI for 5%, or 10%, and still make good sales.
Another fact that you’re already familiar with is that the prices can be pretty unstable. Price changes require more often price tests, and price index can help you with that as well. Instead of randomly lowering or increasing the prices, you can take the price index as your point of reference. Start by increasing or decreasing the prices for, let’s say 5%, and see how the market will respond. In that way, you can test the waters without jeopardizing your market position.
As you can already tell, the main benefit of using the price index is knowing how and when to make changes to your pricing strategy.
Let’s say your competitor’s price index for one brand is much lower than yours. That means that they’ve managed to get a better deal with a supplier. Now that you know this, you’re in a better position to negotiate a better deal as well.
Another way of using price indexes is to calculate them for different product categories. For instance, your business can compete well in the sports&outdoors equipment, but not be so successful in the customer electronic department. You can either decide to focus only on the sports&outdoors category and improve it further, or you can see what changes need to be made to the customer electronics category.
When it comes to your pricing strategy, one more valuable insight lies in analyzing the historical data. Understanding what changes have happened and when will help you enormously to understand the pattern and predict possible future price changes. A price monitoring tool can do a retrospective analysis of the price index changes, and tell you when and where you’ve faced some price changes.
Price index is a metric that will complete your pricing puzzle. Finding the right price doesn’t need to be a guessing game if you have the right knowledge and tools. By understanding the pricing process and following your results in different categories setting the price will be much easier.
What is your experience with the price index? Did you have trouble with calculating it?
Our readers would find your experience very insightful! Feel free to share it.