You think you know your real competitors. Certainly, there are companies you think of first—same industry, similar business model. You name the reason you count them as competitors—but they’re not necessarily your rivals. Thus, the pricing strategy creation process, used upon such uncompetitive competitors, is brutal.
Luckily, there’s a simple workflow you can follow to single out your real competitors, calculate their impact on your sales, adjust your pricing strategy, and avoid pricing wars.
How To Define Retail Real Competitors
To find out who exactly influences your sales, you need to calculate the Price Index.
According to Wikipedia, the Price Index is a normalized average (typically a weighted average) of price relatives for a given class of goods or services in a given region, during a given interval of time. In the meantime, while Wiki uses complex formulas to explain the idea of PI, we are here to share with you a simple method you can apply directly to your business with minimal or no efforts—depends on sources your business has.
The simplest example of Price Index usage is when in the end of the week—or month, or quarter, or year—retailer wants to discover the reasons of its net profit decrease. As long as Price Index is directly connected to sales, it’s easy to see using historical sales and price data.
Below you’ll find a theoretical and practical part on how to define your real competitors and their impact on your sales.
Price Index Calculation
To calculate the Price Index you need to take all Pricing product pairs—intersection of yours and competitor’s products in stock—with an available price.
Then, calculate the Price Index for each product for each competitor you need to divide competitor price by yours.
To see the average Price Index for the current product, just add all Price Indexes and divide them by the number of competitors.
The for last calculation you need to make, in order to see the competitor’s impact on your sales, is to define the average Price Index by competitor.
The last step to is to visualize all the data you’ve received onto a graph—to discover all the deviations.
Now you can see all the price deviations. If you’ll add your sales metrics to the same graph, you’ll be able to easily define who exactly impacts your sales (mostly Competitor 2 at the graph below).
So How Exactly Can a Retailer Calculate The Price Index?
There’s a simple flow you can follow to calculate the Price Index using the above formulas.
Collect Fresh And Reliable Competitor Data On Prices And StocksTo get a reliable result, you need to use reliable raw data. That’s why you need to monitor competitor’s prices and stocks daily. For some industries, e.g. electronics, even a few times per day. Otherwise, you’ll be “tilting at windmills”.
Create a Single Spreadsheet With All the Data You’ve CollectedIn order to manage and manipulate all the data, you need to store it in a single place.
Apply Formulas From the Previous ParagraphYou can easily manage this process, as long as you’re already familiar with MS Excel or another spreadsheet building software.
Build a ChartThis bullet point is not necessary, but very useful to literally see all the deviations and recognize the dependencies between competitor’s changes and your sales results.
Add All Your Sales DataAs we mentioned before, the Price Index is useless without sales data. The Price Index shown by itself will give you market data, but tell you nothing about market impact.
Discover the Exact Activity That Affected Your SalesBy diving from the bird’s-eye-view to the data of current date-competitor-product you’ll be able to see what caused the market change, and affected your sales.
Complexity of Calculation
It’s not really as easy to implement the described flow as it might look.
The first issue retailers usually face is regarding data quality. Some of them grab data from marketplaces, instead of the rival’s website. Some use self-made parsers. Some hire people to do it manually, or buy cheap solutions that deliver low-quality data. As a result, poor data leads to poor pricing decisions.
Then, when the data quality issue is resolved, the next factor—human—steps up and into the game. When our clients share their experience there’s a common problem with human mistakes. They’re available at different stages, including a parsing, data merging, data managing, price changing stage, etc.
Therefore, you can define your key competitors in 15 minutes. However, the preparation process for this time slot is complex and long. That is, unless you’re using an advanced pricing solution that allows you to automate all the processes on data mining and merging, price comparison and changing (check a dedicated case study with an implementation of such solution).
With that said, if you define your key competitors correctly, you’ll be able to choose the best products for promotion, set competitive-yet-profitable prices, forecast demand and inventory, increase total sales by driving associated products, etc.
Calculate the Price Index, discover your market landscape, granulate actionable insights, and make smarter business decisions!
Summary: To maintain a balance in an omni-driven retail world, determination of a retailer’s key competitors is crucial. To reach this goal, a retailer need to collect reliable data, calculate the Price Index, and hire an automation system to create efficient repricing flow. This article discuss the topic of Price Index calculation.
Originally published at Capterra.