The article tells you how the competitor price index (CPI) is calculated and how you can interpret it. By reading this article you will learn:
- What is a competitor price index?
- How is it calculated?
- How can you use it for your business?
Competitor Price Index Basics
Competitor Price Index (CPI) is usually an abbreviation of consumer price index. However, there are multiple ways different organisations calculate their indices. This is why Sniffie calculates 4 different indices in your price matrix and widgets to make it easier for you. These are the following:
- competitor price index (CPI),
- product price index (PPI),
- market price index (MPI) and
- full market price index (full MPI).
What are the differences between these four indexes?
Note: Sniffie CPI utilizes your store’s matched product basket sum as the base
The competitor price index is calculated from products that you and your competitor have in common. It is a sum of all product prices that you two have in common and have matched together. Your website is always shown as 100 and competitors are monitored against that.
Every competitor basket sum is compared to your basket sum (only matched products included). That is, we divide their basket (same products that you and they have) sum with your basket sum and convert this to an index. Values <100 mean that the competing basket is cheaper than your basket. Values >100 mean that the competing basket is more expensive than your basket. If your competitor has a CPI of 100, your baskets are priced similarly. 1 unit in index represent 1% difference. Meaning if a competitor index is 98 they are 2% cheaper.
Sniffie Product Price Index (PPI) compares the average product index to your competitors
Instead of adding all product prices in your basket together, Sniffie (product price index) PPI is calculated by dividing your competitors’ product’s price with your price for each individual product. Then the average of these indices is calculated for your competitor. Values <100 mean that the competing basket is cheaper than your basket. Values >100 mean that the competing basket is more expensive than your basket. If your competitor has a PP of 100, your baskets are priced similarly.
NOTE: PPI will overstate the importance of cheap but very differently priced products in the index calculation. Thus, in most cases you are better off with utilizing CPI in your decision making. However, since certain organizations use calculation like Sniffie PPI in their decision making, we provide this value as well.
Sniffie Market Price Index (MPI) utilizes the average sum of competing baskets as a base level
Sniffie market price index (MPI) is calculated as follows. The average sum of all product prices in your competitors’ baskets is used as the base level of 100. We call this the market basket. Your basket is then compared to the market basket. The calculation is done by dividing the sum of product prices in your basket by the average sum of product prices in the market index. Values <100 mean that your basket is cheaper than the market basket. Values >100 mean that your basket is more expensive than the market basket. Value 100 means that your basket is, on average, priced similarly to all other baskets on the market
IMPORTANT: Why do we then exclude your basket from the market index?
If your basket is priced at a very low or a high rate compared to the market average, your basket’s inclusion would skew the market index calculation. By excluding your basket from the market index, Sniffie can provide information on how your basket compares to all other baskets in the market.
Perhaps you still want to include yourself to the market? Worry not, Sniffie full market price index takes into account your store to the market as well.
Market price indices are calculated for all your competitors by default.
You control the threshold of products included in the CPI and market index calculations
Since basket indices are calculated from only confirmed matches, the more you match, the more products can theoretically be included in a basket. Since not every website sell all products in you basket, getting an exact basket with all products can be difficult. In order to combat this, we always use your matched products as a basis for index calculation. If you sell 10 products and your competitor sells 20 of which 10 are exact matches with your products, only those 10 will be included in the index calculation.
In order to make the calculation transparent, Sniffie’s price matrix shows all the items that are included in index calculations. When you apply any filter, your price matrix is updated and indices are also updated based on the available product in the matrix.
NOTE: When substitutes are included, all indices will be calculated with substitute values as well!
Sample of a Competitor Price Index Matrix
How to use indexes for decision making?
The easiest way to use indexes as a guiding tool for your pricing is to use categories as a base filter and filter down to a level where pricing in that group of products has a relevance. Lets take the example again with iPhones. If you want to know are your iPhones priced correctly you would drill down to the latest iPhone model. Then compare resellers with indexes and box plots. That way you know what the market price spread is and on a category level are you higher or lower priced than your competitors as the index takes into consideration all iPhone 7 products no matter what size or color those are.
How are indices calculated if a certain price has not been updated?
In order to provide a complete picture, Sniffie utilize the last known price within the period in the calculation. If no price point has been extracted within the period, Sniffie will treat the product as a “missing product” and estimate a price point for that product. Of course, this is done only if the product is included in the analytics after filtering.
You will always see the products from which indices were calculated in the price matrix.
Remember to set your website as a reference website in your account settings before utilizing indices in the decision making. If you have not set your website as a reference website in your account settings, the indices are calculated from the website that is set as a reference store and shown green in the price matrix.