Relative Price: Definition, Calculation, and Use in Pricing
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Do you know your market index, product by product ?
Let's plan an exchangeDiscover our pricing optimization softwareThe relative price expresses a price in relation to a reference price: that of another product, 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 product is 10% cheaper than the reference price.
The Essentials
- A relative price is expressed as a ratio or index based on 100 relative to a benchmark, whether for a single product or a basket of goods.
- Changing the reference price from one period to the next creates the appearance of a deviation that does not exist.
- It defines the relative range within which a price must remain, and the deviation that triggers a correction.
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.
product by product, and then aggregated over a basket of KVI.
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 figures |
|---|---|---|---|
| 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 the 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 indicates 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 brand-image product. |
When aggregated across a basket of goods, the relative price becomes a price index; tracked over time, it contributes to the measurement ofprice image (see “Measuring a Retailer’s Price Image”). The deviation from the market can also be interpreted as a price deviation.
How can you manage your relative price?
Select a benchmark, set price ranges by product category, 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 pricing segmentation).
Track Progress
Regular price monitoring alerts you when the market moves and you don't.
Trading on the Spread
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 one's reasoning on an overall average, which masks discrepancies among the products being compared.
- Forget about sales and list prices: comparing a sale 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 displayed in euros—the price on the label. The relative price compares it to a benchmark: a competitor, a similar product, or a past period. The same absolute price can therefore seem high when compared to low-cost competitors and low when compared to premium competitors. It is the relative price that guides the customer when making comparisons, and it is therefore the relative price that is used to steer a retailer’s positioning.
What is the difference between relative price and price index?
In pricing, the two concepts largely overlap: the price index is the relative price expressed on a base of 100, then aggregated across a basket of reference items. We refer to relative price when discussing an individual product—for example, a jar of coffee compared to its equivalent from the main competitor—and to an index when discussing a group of products, whether it’s a category or the entire retail chain. The transition from one to the other is determined by the weighting, which sets the weight of each product.
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, depending on the brand, perceived quality, associated service, or the way they are displayed on the shelf. Being priced on par with a premium competitor may seem like a good deal, while being priced on par with a discount retailer may seem expensive. For more information, see “perceived value” and “actual value.”
How do you weight a relative price index?
Based on the sales volumes of your own products, not on a simple average. Without weighting, a low-margin product carries as much weight as a major product, and the index no longer reflects the customer’s experience. Weighting by revenue is an acceptable alternative, but it automatically overweights high-priced products.
Does a good relative price guarantee a good price image?
No, and this discrepancy is common. The index measures a reality calculated based on a basket of goods; the price image measures a perception built on a few remembered references, the store’s atmosphere, and marketing communications. A retailer can be objectively competitive yet perceived as expensive, which is the most frustrating scenario to correct.
Key Takeaways
- The relative price compares a price to a reference value, often on a base-100 scale.
- In retail, it reads product by product and on a KVI basket.
- It is navigated through corridors, with the margin serving as a guide.
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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Price image is the perception of a retailer’s price level. It is determined by a handful of benchmark products, which are chosen based on what customers remember and compare—not just on sales volume. An index calculated as a simple average may indicate lower prices when customers actually experience the opposite.
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Pricing segmentation is effective when each tier represents a difference in value that the customer can identify—not just a difference in price. It is evaluated based on the total volume and profit margin in euros for the category, never on sales from the new tier.
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