Average Price Paid - Definition, Importance & Example
What is Average Price Paid?
Average price paid is the benchmark amount that customers pay for brands in a given category. Average price paid as a metric is useful while assessing the price premium of a brand in regard to competitors. The average price paid by customers can be calculated using at least two ways: (1) by computing the ratio between category revenue and category unit sales and (2) as unit share weighted average price in the category. It is worth noting that the market average unit price paid includes the brand under consideration.
Importance of Average Price Paid
Average price paid as its definition says, gives a picture of the amount that customers pay for brands in a category. Average price paid is affected by the number of units sold and which thus is an indicator of the status that the sales figures are in accordance of budgeted sales figures. In a category if the low priced brand takes away shares from a high priced competitor, then the price premium rise even if the absolute prices remain unchanged. Similar to the previous case, if a brand is priced at premium, its premium will decline with an increase in market share.
This is because the market share gain by a brand selling at premium price will cause the average price paid to go up. This may be attributed to the invisible hand established by economists. As a result, this reduces the gap between brand and market average. From the explanation of specific cases in the preceding para, it is evident that the category pricing largely depends on the market share of brands that are at the extreme of the price scales.
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Concepts Related to Average Price Paid
Price Premium: It is also known as the relative price of a brand compared to the benchmark of similar products or basket of products.
Average Price Displayed: Marketing managers seeking a benchmark which capture the differences in scale and strength related to a specific brand’s distribution might situate a price between average price paid and that of average price charged and average price displayed.
Average Price charged: This serves a different purpose compared to average price paid. It compares the price set by brand in relation to prices set by competitors without regard to the reactions of customers to these prices. This means all competitors are treated equally.
Formula of Average Price Paid
Average price paid is computed using 2 ways as follows:
Average Price Paid = (Total Category Revenue)/ (Total Category Unit Sales)
Average Price Paid=Unit share weighted average price of the category
Example of Average Price Paid
A marketing manager wants to compare his brand’s price to average price paid for similar products in the market. He observes that Brand A sells $2 per litre and has 20% of unit sales in the market. It’s up market competitor, Brand B sells for $2.1 and enjoys 10%-unit market share. Brand C sells for $1.9 and has a share of 20%. Finally, the budget brand, Brand D sells for $1.2 and commands the market share of 50%.
Average price paid = 20%*2 + 10%*2.1 + 20%*1.9 + 50%*1.2 = $1.59
Price Premium = (2.00 – 1.59)/1.59 = 25.8%
Hence, this concludes the definition of Average Price Paid along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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