What is Pricing Performance? How to Measure Pricing in Your Company

Have you ever wondered about the best way to evaluate the coherence and effectiveness of your pricing strategy? If you think that having a positive profit margin is enough to deem your pricing strategy as successful, that’s a mistake, because you’re overlooking a multitude of other factors. This is where pricing performance comes into play. Let’s find out what it is and how it can help you assess and improve your pricing tactics.

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.

At the dawn of business development, retailers used the cost-plus price measuring method. In other words, they estimated only the gained margin. As you can guess, this approach comes with limitations and puts the seller at a risk of miscalculating the efficiency of their pricing strategy.

To boost the precision of your strategy evaluation, you can introduce the Price Index Indicator. It allows you to calculate all price spikes and decreases for each product inside each category during a certain time period. You will receive a weighted average value that enables you to measure the effectiveness of your suppliers as well as the category management team. However, this approach is rarely 100% correct, especially when there is a choppy market and uncertain demand.

With all the above-mentioned information, we can affirm that performance of pricing is a complicated subject, just like prices themselves. To create a successful pricing strategy, you should begin by asking the right questions and realize what goals and objectives you want to accomplish in a certain period of time. Your strategy should be based on the answers to these questions, so it is advisable to begin the measurement process by selecting a strategy or a set of tactics that are suitable for the retailer's portfolio.

There is no definitive set of KPIs that work equally well for every company, yet there is a range of more standard metrics, which we will discuss in more detail. Some of them are pure, commonly used KPIs, while others can be used as complementary benchmarks that are specific to a company.

Here is a list of possible KPIs that you can use in your business:

• Gross Profit Margin is a key performance indicator that is often used by companies to measure how much money is left from the revenue after deducting the cost of goods sold and is expressed as a percentage of the revenue. This is a good indicator of how profitable your products are.
• Total Revenue is the total amount of income your business receives from selling its products or services.
• Won/Lost Opportunities Ratio.
• Number of Deals.
• Average Deal Size in a set period (month, quarter, year) divided by the number of closed/won opportunities during that same period.
• Number of Accounts is the amount of customers that your business has.
• Number of Products/Services.
• Number of Accounts per Salesperson.
• Sales Per Person reflects the revenue of a business in relation to its total headcount. It is often tracked, as it is an indicator of the efficiency of the business as a whole, rather than the efficiency of the individual salespeople.
• Accounts with a positive or negative margin.
• Products with a positive or negative margin are the goods that either made a profit (positive margin) or caused a loss (negative margin) to the company. Alternatively, you can measure the number of transactions with a positive or negative margin.

Your manager can find business-specific metrics that will help you evaluate the efficiency of your pricing strategy. The more internal and external data you process, the more detailed reports you will receive.

Are you wondering how to improve price performance? Instead of wasting tons of time on manual analysis and endless experiments, you can entrust this task to software, for example, Price Intelligence and Repricing tools by Priceva. Implement advanced pricing analytics that will assess and improve your pricing strategy in three steps:

1. The software will obtain and process market data (competitors’ prices and sales volume, your historical pricing data, and so on) from different sources.
2. You establish the goals of your strategy, for example, increasing profit margin.
3. The system will suggest improvements for your performance, show you how to make your prices more competitive and, if necessary, can automatically update prices in your online stores.

This way, you can proactively react to market changes, find violations in your pricing policy, estimate the efficiency of your pricing decisions, and offer the best deals without wasting time and money on routine tasks.

Estimating performance is a real challenge because there is no one-size-fits-all set of KPIs that would apply to each and every E-commerce business. However, once you develop a coherent strategy and implement modern software, you will be able to properly analyze the effectiveness of your pricing decisions. Keep in mind that pricing is not just about numbers on the tag, but a series of variables that impact and complement each other.

This is a visual representation of the price-performance ratio that’s based on an equation used to balance the cost of an item against its effectiveness.