Price performance ratio is a metric that’s typically used in economics to measure a product’s ability to deliver performance for its cost. It implies that the lower the price/performance ratio, the higher the demand for the item. Yet, in the E-commerce industry and pricing management, the meaning of pricing performance is not the same.
To explain how it is used in the retail industry, we’ll start with the fact that product cost impacts all major sales metrics, including revenue, gross profit, and demand. If you are a well-established retailer, you have prices and the amount of sold goods – these are interrelated points. Prices also impact your profit and sales numbers.
The next thing we should mention is that you cannot predict how the future sales volumes will change depending on your current business model. This is explained by the fact that price itself is affected by a number of factors:
- Price index relative to brand and product categories;
- Price index of similar products by competitors;
- Cumulative price change over a certain period;
- Promotions and discounts;
- The cost itself.
The price of any item is determined by many different factors. For instance, when a consumer is looking for a certain type of goods, they are usually only aware of a few brands that are promoted more than others. As such, these brands become the main focus of the consumer, who often believes that these are the most reliable brands. These brands become the “anchors” that the consumer uses to compare the cost of different products.
This forms a subjective scale with the anchors as the reference point. Hence, a price index can be determined for a product based on its brand, category, and the group of products it belongs to, with the leader brand/category serving as a guide. These are just a few points of evaluation, but there could be more.
In addition, the cumulative changes in pricing should be taken into account as well. Customers can form an opinion or have a recollection of how the price of a particular item has changed recently. If customers feel that the product is increasing in cost too rapidly, it may cause irritation and the customers may react negatively to any more price modifications.
Discounts, strategies and tools used to advertise special deals also have relation to the price. For instance, if a discount is available, the store should monitor how much revenue was generated from attracting new customers and how much was sourced from other products they carry.
With all the above-mentioned points, we can finally answer the question, “What is pricing performance in E-commerce?” In fact, it can be any metric that is calculated by dividing the difference between the price and the benchmark price by the latter price.
Note that the cost of the item itself cannot serve as the only performance benchmark, and here is why.