RELATIVE PRICE: Definition, Calculation, and Use in Pricing
Definition
A relative price expresses a price in relation to a reference price: that of another good, a competitor, or a past period. It is calculated by dividing a price by the reference price and is expressed as a ratio or as an index with a base of 100.
The term has different meanings depending on the context: in economics, it compares two goods; in retail pricing, it compares your prices to those of your competitors; and in statistics, it compares a price to that of a base date. All three are based on the same idea:a price can only be assessed by comparing it to others.
The Three Meanings of Relative Price
| Meaning | Definition | Formula | Example with Numbers |
|---|---|---|---|
| Between Two Goods (Economics) | What Must Be Given Up in Exchange for One Property to Obtain Another | Price of Property A ÷ Price of Property B | A table costs 30 € and a chair costs 10 €: the relative price of the table is 3 chairs |
| In the Face of Competition (Retail Pricing) | Your price compared to that of a competitor or the market | (Your price ÷ competitor's price) × 100 | €4.50 at our store, €5.00 at a competitor's: index 90, or 10% cheaper |
| Over time (statistical) | Price on a given date relative to the price on a base date | (Price on the date ÷ price on the base date) × 100 | €2.20 today, €2.00 last year: index 110, representing a 10% increase |
Illustrative numerical examples, provided for educational purposes.
Relative Pricing in Retail
This is the most useful metric for a distributor. The relative price, expressed as an index, indicates where the company stands in relation to the market, product by product.
- Index below 100: You're cheaper than the benchmark. This is a competitive strategy, but it comes at the expense of profit margins.
- An index of 100: you are aligned. This is the rule for aprice-alignment policy.
- Index above 100: You are more expensive. This isn't a problem if the perceived value justifies it, or if the product isn't an image-driven product.
When aggregated across a basket of products, the relative price becomes a price index. Tracked over time, it serves as a basis for measuringprice perception, as described in our article “Measuring a Retailer’s Price Perception.” The deviation from the market can also be interpreted as a price deviation.
How can you manage your relative price?
- Choose the benchmark: direct competitor, market average, or best price. The choice affects the interpretation, so it must be explicitly stated.
- Set a target range by product category: narrower for key products, broader for shelf fillers. See the pricing segmentation.
- Track changes: A relative price deteriorates when the market moves and you don't. Regular price monitoring provides an early warning.
- Managing margins: Every index point has a cost. See pricing strategy and competitive pricing.
Common pitfalls
- Comparing products that are not the same: without a reliable way to match products, the relative price is inaccurate.
- Relying on an overall average: it masks the discrepancies in the products that customers compare.
- Forget about promotions and net prices: comparing a promotional price to a regular price skews the index.
Would you like to know how your price compares to others for each product?
Booper calculates your relative prices compared to the market across all your channels and helps you set price ranges that protect your margins and price image.
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A relative price expresses a price in relation to a reference price: that of another good, a competitor, or a past period. It is calculated by dividing a price by the reference price and is expressed as a ratio or as an index with a base of 100.
Divide the price under consideration by the reference price. For two goods, the relative price is equal to the price of good A ÷ the price of good B. In the context of competition, this is often multiplied by 100 to obtain an index: (your price ÷ competitor’s price) × 100. See the three meanings and their examples.
An index of 100 means the price is in line with the benchmark. Below 100, you are cheaper: at 90, you are 10% cheaper. Above 100, you are more expensive. This reading only makes sense on a product-by-product basis or for a basket of KVI products, not as an overall average.
The absolute price is the price listed in euros. The relative price compares it to a benchmark: it indicates whether the product is expensive or inexpensive relative to something else. The same absolute price may be high when compared to inexpensive competitors and low when compared to premium competitors.
In pricing, the two concepts overlap:the price index is the relative price expressed on a 100-point scale, aggregated across a basket of products. We refer to the relative price for an individual product and to the index for a group of products.
To benchmark its prices against the market, establish a pricing strategy andalignment rules, and track deviations over time. It also supports the measurement ofprice perception.
No, not on its own. It compares prices, not values. Two products with the same relative price can be perceived very differently depending on their quality or brand. See " perceived value" and "actual value."
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