Categories in the FMCG industry are not only huge but also very competitive. The world’s largest companies compete with each other, together with a big amount of local producers. One of the most popular ways to compete for brands in such categories is by price. But how do you understand where you are in comparison to your competitors? Can you shape your brand’s strategy and tactics based on price positioning? There’s an extremely powerful metric that can help you with such matters: the price index.

The price index can be calculated and used in many different ways, but for the purpose of this post, we will use the following definition: your product price as compared to the average product price in your category. To get the correct number, we multiply it by 100.

So what does this number mean? If your price index is 100, then you’re priced exactly as the average market price in your category. Anything higher than 100 means that you are more expensive than your competition (average category price). A price index of 105 means that you are 5% more expensive on average. 200 would mean that you are twice as expensive on average. It works the same the other way: anything lower than 100 means that you are competitively priced. A price index of 97 would mean that you are 3% cheaper on average.

Why is this metric so useful? It helps you understand your brand’s price positioning and compare it to your key competitors. In addition, it helps you to keep track of price trends within your category. Sudden movements in pricing strategies within the category will have a clear impact on price indices: on brand- as well as SKU level. This is particularly visible when you compare price indices over different time periods.

Use price index as a basis for category segmentation

Another popular way of applying the price index metric is to create different price segments in your category. This works best in highly competitive categories. Marketers use this kind of segmentation to define opportunities for innovations. Correctly launching a product in a specific price segment can cause a decent uplift for your brand. It also helps understand how current price levels in the category are perceived.

Let’s look at an example:

On the graph we see the category split into 4 segments and their share respectively: Super premium, Premium, Mainstream, and Economy. Company A is active in this category and is thinking about launching a new brand to strengthen its competitive position in unexploited price segments. Let’s look at Company A and its brands. 

As we can see, the company has several brands across different price segments, however, it doesn’t cover the premium segment (PI 115-149). The premium segment represents 30% of the market, therefore it is definitely a very attractive segment to launch the new brand in. Thus it makes sense for Company A to consider a premium price level for its next launch. On top of this, by launching a new brand in the premium segment, company A can avoid cannibalization of its own brands (because they compete in another price category). 

The simplified example above shows how powerful and useful the price index metric is. It allows you to view the category landscape in a unique way and it can help shape your strategy and tactics in the future. It also helps understand your price position in the market, which is particularly useful because competitors everywhere are constantly changing their prices just as you do. Knowing your brand’s price index informs you how to keep competing in highly competitive markets and helps understand how consumers perceive your brand.