Price Skimming

Price Analysis – The Ultimate Guide

When creating an understanding of the value of a product, price analysis is vital. In fact, it has never been so important.

This is in no small part thanks to huge advances in technology. Whether shopping commercially or for personal use, modern buyers have access to vast amounts of pricing data with just a few simple internet searches. Simply put, the online shopper now has a much greater awareness of pricing and is more advanced than the consumer of the past. They understand that they can look for the best prices and the best value and use technology to do this.

The first thing you must acknowledge when analysing a product or service is that price is the top reason why online shoppers choose a product or brand. Often online stores have similar or identical product assortments, meaning, they sell the same products, and have to compete on price.

What is price analysis?

Price analysis is used in marketing where it refers to the response that consumers might have to theoretical prices due to research carried out.

In general, price analysis is the process whereby a price for a product is examined in detail and evaluated. As this process provides valuable data, this is often the stage that precedes choosing a pricing strategy. However, it is not to be confused with cost analysis, as this does not include an evaluation of the costs that there might be for that product.

A business may have a preferred approach to evaluating the available options to them with a product. Using various price analysis techniques, they can look at the price of the product they offer compared to any alternatives or similar products that might be on the market from their competitors.

Pricing analysis is important in the following situations:

  • In any test marketing
  • When you are looking to select an introduction strategy
  • For positioning strategy
  • For evaluation of new product ideas

It is not just for new products but existing ones as well. This could be due to changes in your target market, competitive environment if your product has not been performing well or simply because you have made modifications to your marketing strategy since you launched the product.

What is the process for price analysis?

Your price analysis begins with looking at the responsiveness your product market may have to your pricing. It is always a challenge to consider how buyers will respond to alternative pricing but priced too high you may not attract the sales and priced too low you may find potential buyers are concerned about quality.

Take a look at the marketplace; the first thing you need to know is where you stand. What other products are out there like yours? Who offers alternative products that could do the same as yours? How are they priced?

Price index

Having identified your market competitors, do some calculations and work out the product's average market price in question. You can use this to calculate the price index. A simple formula to do this would be:

Competitor price / Your price x 100

This formula can be used to look at prices in a more in-depth manner. For example, it may flag procurement issues. Maybe your competitor is getting preferential rates from a supplier that allow them to offer a lower price. Taking a look at where your pricing is better or worse than your competition will allow you to make appropriate adjustments to your own pricing where possible.

Historical price data

Keeping track of competitor pricing is vital, although without the help of software can be time-consuming. Over time as you collect information, you will spot patterns and trends in your competitors' behaviour. This information can be used to inform your pricing strategies, ensuring that you do not make a loss.

Do not just analyse your competitors' data; take a look at your own as well. This will give you a real insight into where you might have gained the upper hand in the marketplace and which of your products proved to be more elastic.

This job can take up a considerable amount of time, so you may want to consider pricing software to assist you in the task.

Different strategies

To develop the right pricing strategy for your products, it is necessary to analyse the pricing situation. This might include looking at a single product line or a mix or choosing the right price strategy for a new brand or product. You should complete an analysis of price-volume to check up on your price elasticity as well. Do not forget their price strategies are grouped according to the price a company charges in relation to your competitor's prices.

There are a few different strategies that can be adopted, these include (but are not limited to):

  • Market penetration pricing – a business sets an initial low price
  • Price skimming pricing – this is the opposite of market penetrating pricing
  • Economy pricing
  • Competitive pricing

Read a more detailed article on pricing strategies.

Advantages and Disadvantages of Price Analysis

Unfortunately putting a price on your product is not always as straightforward as you would like. And as with so much else, there are advantages, and disadvantages, to completing price analysis without professional assistance. It is advantageous to ensure that you cover any of the costs you have invested in each product while ensuring that your product is appealing to customers. This makes sure that you are taking into account all your costs and not pricing yourself significantly higher than your competitors, which would likely mean you would not see the sales your company needed.

Of course, the disadvantages of price analysis can occur when the strategies you choose to use are unsuccessful. This might be because your product or service is not appealing enough to your customers at your desired price point or maybe a competitors brand is more robust, lots of other factors can affect the outcome.

In-house price analysis can be difficult to know where the 'sweet spot' is to price your product or service that does not already exist in the market. This could have a detrimental effect on your bottom line. So it is important to include accurate marketplace data to see where you stand in the competitive landscape. Then you will have a better chance of success.

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