written by: N Nayab•edited by: Ginny Edwards•updated: 3/5/2011
Relative pricing is the price of one product in terms of another or the ratio of two prices. Read on to understand how business managers and entrepreneurs can use relative pricing to increase sales.
slide 1 of 5
Product pricing is dependent on many factors and plays a critical role in not just boosting sales but also in establishing the reputation and long-term growth of the company. Relative pricing, which denotes the opportunity costs of purchasing a product or service, finds use in determining the "real price" of a product in order to make relevant comparisons, which helps to position products better and boost the sale of supplementary items.
slide 2 of 5
Determining Real Prices
A major use of relative pricing is to determine the real price of products and services. For instance, if the price of a mobile phone is $200 and the wage rate is $10.00 per hour then the relative price of the mobile phone is 20 hours of labor. Assuming inflation increases the price of the mobile phone to $260 and the wage rate subsequently increase to $20.00 per hour then the relative price of the mobile phone is equal to 13 hours of labor. This means that the “real" price of the mobile phone has fallen even though the price has increased.
Determining real prices through relative pricing plays a major role in boosting sales of products by identifying the purchasing power of the people, enabling companies to position products accordingly.
In the above relative price example, as mobile phones become affordable owing to relative price change, mobile phone manufacturers can unleash an extensive marketing campaign that conveys the impression of the mobile phone as an affordable utility multipurpose gadget, enticing more people to buy the product.
Conversely, if relative price changes increase the real price of a product, customers may seek to advance buying decisions in anticipation of further rise. A good example in this category is vehicles and houses, where customers prefer buying on loan rather than saving money to make a down-payment purchase.
slide 3 of 5
The most apparent use of relative pricing is to compare the prices of two similar and often competing products. It also finds use to express the ratio of a product price to the weighed average price of all similar products, which reveals whether the product is overpriced, under priced, or on par with industry standards.
Using relative pricing to compare product pricing helps determine product positioning, or in other words to make decisions whether to set prices above, below, or at par with the competition or industry average. For instance, a premium product needs to be priced higher than the average market price for similar products, and new entrants trying to capture market share would obviously need to price the products competitively, at less than average prices.
Relative pricing also provides flexibility to set up minimum and maximum charges for a product in various currencies. This helps prevent middlemen undercharge or overcharge for the products.
Using relative pricing to increase sales however works only in a market where prices remain visible, customers display a high sense of price awareness and maturity to understand product characteristics, and all products of varying prices are available freely.
The main aim of market neutral or relative value strategies is profiting from pricing and market inefficiencies, and the attractive pricing of fake goods relative to the genuine products could be an incentive for purchasing imitations. The application of relative pricing helps negate such profiteering and inefficiencies, boosting customer confidence and subsequently sales in the long run.
slide 4 of 5
Selling Complementary Products
Another use of relative pricing is to sell complementary products, but adding on a product to the main product for a small relative price.
A relative price example of selling complementary products using relative pricing is offering “an extended warranty" along with a new car at a small, often negligible percentage of the car’s purchase price. The customer would initially have no intention of buying such a product, and would rarely purchase the product separately. With the product positioned as an attractive “add-on" to an already desired product, and at a negligible rate, the customer becomes enticed to go for the product.
Another similar application of relative pricing is to sell technical support for products. Pricing technical support for different products independently is a complicated task, with many unknown and uncertain variables. Associating the product with the main product, and fixing a relative price, such as, say annual maintenance charges at five percent of the product's cost, makes pricing and selling such related products easy.
slide 5 of 5
Watkins, Thayer. San Jose State University Economics Department. “Relative Pricing." http://www.sjsu.edu/faculty/watkins/relativeprices.htm. Retrieved 01 March 2011.
Solutions. “Relative Pricing – The smart way to provide additional offers relative to cart value." http://www.payproglobal.com/relative_pricing.html. Retrieved 01 March 2011.