Relative Price: Definition, Calculation, and Use in Pricing
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Do you know your market benchmark, product by product?
Schedule a meetingDiscover our pricing optimization softwareThe 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 the price under consideration by the reference price and is expressed as a ratio or as an index with a base of 100. In retail pricing, an index of 90 means the price is 10% lower than the reference price.
The Essentials in 6 Questions
A price expressed relative to a benchmark, as a ratio, or on a 100-point scale.
Pricing teams, economists, statisticians.
In real time, as soon as the market moves.
Calculated on a product-by-product basis, then aggregated into a KVI basket.
To determine whether a price is expensive or cheap compared to something else.
(Your price ÷ reference price) × 100.
The Three Meanings of Relative Price
The meaning of the term varies depending on the context, but it is always based on the same idea: a price can only be judged by comparing it to others.
| 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: expressed as an index, it shows where the company stands relative to the market, product by product.
| Index | Reading | Involvement |
|---|---|---|
| Less than 100 | Cheaper than the standard model. | A choice driven by competitiveness, which eats into profit margins. |
| Equal to 100 | Aligned. | The rule of an alignment policy. |
| Greater than 100 | More expensive. | Acceptable if the perceived value justifies it or if the product is not a prestige product. |
When aggregated across a basket of goods, the relative price becomes a price index; tracked over time, it serves as a measure ofprice perception (see “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?
Select a reference price, set price ranges by product category, and monitor and adjust based on the margin.
Select the part number
Direct competitor, market average, or best price: the choice must be explicitly stated.
Set a range by role
Narrower on the KVI, broader on the shelf background (see price segmentation).
Track Progress
Regular price monitoring alerts you when the market moves but you don't.
Trading on the Margin
Each index point has a cost (see pricing strategy and competitive pricing).
Our competitor price surveys provide benchmark prices; our price optimization software calculates your relative prices across all your channels and sets price ranges that protect your margins and price image.
The 3 Common Mistakes with Relative Pricing
Incorrectly matched products, an overall average, or overlooked promotions skew the index.
- Comparing different products: without reliable matching, the relative price is inaccurate.
- Basing the analysis on an overall average, which masks discrepancies among the products being compared.
- Forget about promotions and net prices: comparing a promotional price to a regular price skews the index.
Frequently Asked Questions
Short answers to the most frequently asked questions about relative price.
What is relative price?
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.
How do you calculate the relative price?
Divide the price under consideration by the reference price. For two goods: price of A ÷ price of B. When comparing prices in a competitive market, the result is often multiplied by 100 to obtain an index: (your price ÷ competitor’s price) × 100.
What is the difference between relative price and absolute price?
The absolute price is the price listed in euros; the relative price compares it to a benchmark. The same absolute price may be high when compared to low-cost competitors and low when compared to premium competitors.
What is the difference between relative price and price index?
In terms of pricing, they overlap: the price index is the relative price on a 100-point scale, aggregated across a basket of goods. We refer to the relative price when discussing a single product, and to an index when discussing a group of products.
Does relative price take perceived value into account?
No: it compares prices, not values. Two products with the same relative price can be perceived very differently (see perceived value and actual value).
Key Takeaways
- The relative price compares a price to a reference value, often on a base-100 scale.
- In retail, it is broken down by product and based on a KVI shopping cart.
- It is navigated through corridors, which are defined by the margin.
Would you like to know how your price compares to others for each product?
Your prices relative to the market, product by product, with price ranges that protect your margin.
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