Price index formula – definition and how to calculate price index

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Every brand and every e-commerce business owner should be vitally interested in their price positioning. Why is that? Building a consistent pricing strategy is essential from the strategical perspective for building brand image. To manage it effectively and find out how your products are positioned on the market, you need reliable data about your competitors and prices on the market. Are your prices low or high? To find a data-based answer,  you need to calculate a price index. In this article, we will show you how you can calculate the price index on your own using the price index formula and how to find it in the Dealavo tool. We will also analyze the importance of the right price positioning in e-commerce.

Price positioning and pricing strategy

As a rule of thumb, your price positioning should match your brand and products in your offer. Here’s a quick example. Suppose you’re selling premium products. If you offer them at too low prices, it can adversely affect your price positioning. Eventually, you can lose the premium label altogether. About two years ago, there was a high-profile case of the high-end clothing brand Burberry.

They destroyed excess products worth over 28 million pounds. And yes, there were some environmental and counterfeit issues involved, but many people asked, why didn’t they sell these products at discounted prices instead of destroying their own products? The short answer is to protect their brand’s price positioning.

Pricing strategy is one of the most important elements of every e-commerce business. Your prices have to be attractive to your customers and profitable but also compliant with the brand image you want to achieve and maintain. Simply put, if you want to build a premium image, you can’t afford to be cheap. If Burberry sold their products at Zara’s prices, it would be a disaster to their image. And yes, most likely, they would have sold tens of thousands of products but for a price of losing many of their regular customers.

Of course, when it comes to premium brands, lowering prices is often not possible because of the quality of the materials used. You can read about this in an interview with Igor Gębarowski, in which he explains what factors are taken into account in price management at Dibaq.

With this introduction done, let’s find out something more about the price index formula.

How can you calculate the price index formula?

What can you do when you want to find out what your price positioning looks like compared to your competitors and the market? There is a quite simple price index formula, and this is how it looks:

price-index-formula

Your starting point is always 100%. When you get 100%, this means that your price is exactly the same as your competitor’s. When the result you obtain is over 100%, this means that your prices are higher. When you get under 100%, this means that your prices are lower compared to this particular competitor.

Of course, in the real world, you have more than one competitor. After calculating the price index for each one of them, you simply sum your results up and divide them by the number of competitors:

price-index

Of course, these calculations work for just one product. You have to repeat the process for all of your products. We recommend aggregating data for different product categories – we describe it below. With the Dealavo tool, you can go even further and visualize that data on a graph. This way, it will be much easier to discover all the significant deviations. And if you compare this information with your sales, you can quickly estimate which competitor’s prices have the biggest impact on your financial results.

Automate price monitoring

Doing all this manually is an extremely time-consuming task. You can speed things up by using the intelligent price monitoring solution offered by Dealavo. With our help, brands can regularly monitor their prices and compare them to their competitors’ ones. This way, you are automatically informed of any price changes that can affect your sales.

We invite you to read our second article on this subject: How to check your price positioning in comparison with competitors?

Price index for product categories

As we mentioned before, price positioning and the price index are worth considering in relation to each of the product categories. This is because it may be that some elements of the offer are particularly attractive to consumers, while in other categories the brand is relatively expensive. For example, an electronics manufacturer may offer mid-priced laptops while manufactured phones are priced exceptionally low. It’s worth taking such elements into account, e.g. when building a consistent marketing message.

In the Dealavo app, the price index can be checked in the “Segments” tab. Users of the price monitoring tool can define the product categories they want to track their price positioning for. In the form of clear graphs they also receive information about:

  • how the prices in a given product category differ in comparison to each of the analyzed competitors,
  • availability of products in particular categories, 
  • historical changes in price positioning.  

An interesting solution is also the analysis of your brand’s positioning across your clients (retailers). If you choose this option, the Segments tab will give you an overview of the market situation for particular groups of products. For each segment created by you you can check for example:

  • availability of the products assigned to created labels at the particular retailers,
  • percentage differences in reference to RRP for chosen product labels at particular retailers,
  • history of changes introduced by the retailers for particular product labels.

To learn more about our offer, please contact us

Price positioning from the e-commerce perspective

Although this article is mainly for producers and manufacturers, this doesn’t mean that online stores shouldn’t be interested in price positioning. However, things look a bit different here, primarily because producers and brands compare prices of different products (substitutes, competitive products), and online stores compare prices of the same product (offered by many merchants). In both situations, Dealavo’s solution comes in handy. 

In many instances, price monitoring is a good way to get more information coming from the market and your offer. For example, it may turn out that you can get ahead of your competition by lowering your prices by just 0.5%. With our price monitoring, you can easily check your price positioning for every product, but also for every competitor. This way, you can verify what products your offer are cheaper/more expensive compared to your competitors.

Online stores can also take advantage of the Segments tab offered by Dealavo. In a clear form, they will then receive information about price positioning of their online store in each relevant product category in relation to each of their competitors, as well as a comparison of in-store availability. For each segment created, you can check: 

  • availability status of the selected groups of products at given competitors, 
  • percentage differences in prices relative to your product price or retailer prices for selected product groups,
  • historical competitor behavior on selected groups of products.

Order a free online shop analysis

If you run an online store and want to see a sample of our possibilities, order a 100% free Shop Analysis Report. With our report, you can find out:

  • Is your online shop competitive?
  • Who is your cheapest competitor?
  • How large is the market you’re operating in?
  • Can you increase your profits?

All you have to do is fill in our contact form and upload an XML or XLS file with the list of products (up to 500 EAN codes). In return, we will send the report with information about the selected products to your e-mail address within 24h (on business days). If you have any doubts – you can simply contact us:

Contact us!

If you want to learn more about price tracking software, we recommend our article: What is price checker (price monitoring tool) and how to choose the right one?