Price Indexes

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Price indexes are useful to compare prices across products, customers and over time, to assess discount levels and to which degree discount policies are enforced.

Types of Price Indexes

There are two important price indexes related to a sale transaction or a contract:

  • The list price index: the ratio between the pocket revenue generated (after all discounts and rebates) and the “list revenue” that would have been generated if all products and services had been sold at their list price (undiscounted) as defined in the applicable price policy.
  • The target price index: is the ratio between the pocket revenue generated (after all discounts and rebates) and the “target revenue” that would have been generated if all products and services had been sold at their target price as defined in the applicable discount policy.

Example

To take the example of a transaction involving a single product P1 with list price of €12 and target price for a given customer segment of €10, if P1 is effectively sold (after all discounts and rebates) at the pocket price of €9, two price indexes can be calculated\[ \operatorname{List Price Index (P1)} = \frac{Pocket Price (P1)}{List Price (P1)} = \frac{9}{12} = {0.75} \]

(This index reflects that the level of discount is 25% = 1-0.75 versus the list price)


\( \operatorname{Target Price Index (P1)} = \frac{Pocket Price (P1)}{Target Price (P1)} = \frac{9}{10} = {0.90} \)

(This index reflects that price is 10% below the discount policy)

Conclusion

In practice, calculating the price indexes of a customer contract may be complex when the contract involves multiple transactions or orders, a large basket of products and services with complex (or even customizable) tariffs including multiple price drivers with a high number of possible values. As a consequence, many companies are not able to calculate price indexes at the product and customer level on a regular basis to monitor actual discount levels and compliance with the price and discount policies.

List Price indexes are also useful to calculate the Peer Price of a customer, i.e. the price that is usually charged by the enterprise to customers having the same characteristics. List Price indexes permit to compare between them the prices charged to customers having different price driver values and product mix. Last but not least, List Price indexes permit to monitor the effectiveness of price increase campaigns or rerating campaigns.