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What is the Price Index: Definition & Calculation

By Priceva
on November 23, 2022
In order to thrive and outperform their competitors, e-Commerce businesses need to keep tabs on pricing and optimize the cost of their goods. The price index allows for making a more detailed and accurate analysis of prices both on your shelves and those of your competitors. This guide explains what the price index is, how to calculate it and use it in your financial strategy.

What is the Price Index (PI) Used for in eCommerce?

The price index (PI) is the figure that shows the difference in prices between your business and your competitors’. It is an important factor in the e-Commerce niche because it allows you to see under which conditions competitors are operating and what companies take up the biggest share of your market.

Studying price index is based on three criteria:

  • Knowledge of competitors’ assortment;
  • Calculation of price index according to a formula;
  • Analysis of sales history.

This information will enable you to make comparisons and understand deviations on the market.

Price Index Calculation

Let’s go over several formulas used to calculate the exact price index for each product and average price index for several competitors.

To start with, you need to calculate the price index for each product or each competitor. This is done by dividing the cost of a competing product by the cost of your own item:
To calculate the average price index on the market, divide the sum of calculated price indices by the number of competitors:

How Exactly to Calculate the Price Index?

In order to get accurate price index calculations, follow the steps below:

  1. Collect relevant pricing data. The more competitors you want to compare, the more time you will have to spend on manual work, so make sure to use reliable monitoring tools. In some markets, prices should be monitored daily, otherwise you risk dealing with outdated prices or competitors that no longer exist.
  2. Make a single spreadsheet with all the pricing data you collect. It should be properly structured and easily available for you to operate it seamlessly.
  3. Use formulas from the previous paragraphs. Adding data gathered in your spreadsheet should not be a problem – you can fetch information from MS Excel in a few clicks.
  4. This point is optional but it wouldn’t hurt to visualize the data – you will be able to see market tendencies and compare competitors’ sales results.
  5. Fetch all your sales data. Analysis of price index would be useless without sales data because it tells you what market impact your competitors have.
  6. Find out what affected your sales. Armed with all this information, you can figure out how price changes affected buyers' purchasing decisions.

Complexity of Calculation

At first glance, doing all the calculations using the above-mentioned formulas is an easy task. However, you should be prepared to run into some issues.

The major problem that you might face is data accuracy. Some companies make a mistake by getting information on marketplaces instead of from rival websites directly – these numbers may differ significantly.

Other eCommerce businesses use their own parsers or obtain pricing information manually. But since our concentration lasts up to a few hours, the risk of human error is pretty high. Irrelevant data can lead to wrong pricing decisions.

Even if you manage to achieve impeccable data quality, it’s only half the battle – you must also process and analyze the information. Human errors can occur when a person compares figures or tries to figure out a repricing strategy.

How to overcome this problem? Automation is the answer. Consider integrating repricing tools and price optimization software: it will track prices on competitor websites and marketplaces, analyze pricing history and provide recommendations on optimal price points. You can get real-time price index data by adding your formulas to a software dashboard – no manual calculations required.

How Can the Price Index Affect Your Pricing Strategy?

Essentially, the price index serves to show the direct relationship between prices for the same item or service. It can also be applied to analyze the whole lineup to see how your business stands out from the crowd of your competitors.

How exactly can these numbers be used in your business? By analyzing price fluctuations and sales volumes at those moments, you can draw the conclusions concerning the way price impacts demand. With this data at your fingertips, you can make predictions about sales of certain goods and predict the market’s reaction to such price changes.

As we’ve mentioned, price tracking software is here to help: it will analyze pricing data and sales statistics for you to make an in-depth competitive study. Just choose the metrics you want to research and don’t forget that price indices can be calculated automatically. Priceva software can also generate recommendations or even update your prices routinely – that’s a great feature for businesses that need price updates several times a day.

How to Adjust Your Pricing Strategy with the Price Index

Price index data will enable you to build a more efficient pricing strategy based on both competitor and market analysis. The key point here is to identify market ups and downs and adjust your prices in a way that allows you to sell more.

For example, you will be able to catch the moment when your competitors reduce prices or when they are selling off the remaining stock from their warehouses. That will allow you to understand what drives price fluctuations and be prepared for different situations that occur on the market.

In short, the price index helps you to adapt smarter and quicker by seeing what price points work better at certain moments. You get better control over your pricing strategy and can predict great profit generating opportunities.

Conclusion

The price index is the metric that shows how your goods or a category of goods are positioned on the market. It can be calculated using the above-mentioned formulas or with the help of repricing software that automatically gathers pricing information. By using the price index you can take a peek into competitor tactics, make data-driven decisions and keep your price points at an optimal level.

FAQ

What is the price index in simple words?

The price index is the metric that shows the difference in price between your and competitors’ prices for one and the same product. It also indicates a measure of the proportionate, or percentage, change in a set of prices over time.

What is the price index example?

One of the price indices is Consumer Price Index (CPI) – it shows price changes in a basket of consumer goods or services, and averages for each position.

What is a normal price index?

This is a relative metric that varies depending on the market niche, period and many other factors. The price index itself is a normalized average of price relatives for certain items or services during a certain interval of time.

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