Price Comparison Methods: Total Basket Value vs. Price Index

Price comparison has been a topic of interest for economists for hundreds of years. Although numerous methods have emerged over time, it is still impossible to point one out as universal and the best. The appearance of price monitoring tools has made the choice even bigger. Two price comparison methods stood out though: Total basket value and Price index.

In this article, we’ll discuss and compare these 2 methods.

1. Total Basket Value – Is Simpler Always Better?

This method is based on something that everyone is familiar with – market basket, and its most common type – consumer basket. 

The basket consists of consumer goods whose price is regularly evaluated and her main focus is to track the inflation in one country. Another important fact is that the consumer goods present in the basket need to be representative of the broader economy and therefore are adjusted from time to time. 

When we are speaking about price comparison methods, there are a few things that this method needs to provide, which are not so simple to achieve:

• For a comparison to be valid, it is necessary to compare the same, or at least very similar items. But the product range of the two competitors is not always necessarily the same – it is quite possible that Competitor A does have Product X in their offer, but Competitor B does not;
• Another challenge is how to achieve that expensive and cheap products participate in this calculation in an equal way (as we said, consumer basket consists mostly of basic products that can be found in every supermarket; those items are comparable and their price is pretty much the same in every supermarket, or very similar). For example, Product X which costs 1000 USD will impact the Total Basket Value so much more than Product Y, which costs 10 USD.
• The third challenge with using this as a method of price comparison is the fact that you usually need to compare N competitors (not only 2).

The total basket value is therefore a price comparison method most suitable for supermarkets or other FMCG products. That is the reason why this method was only recently implemented in Price2Spy. Even though we have a variety of clients, retail ones prevail. But we recently had some large supermarket clients who expressed the need for this kind of price comparison, so we decided to give it a go. 

The total basket value is a fairly simple method mostly due to the method of calculation, which makes it suitable for presentation and advertising purposes. However, a method that is simple yet intuitive – consumers understand it the best, it is the easiest to advertise, but it is terribly sensitive. The problem occurs if a competitor does not have such a product (therefore there is nothing to compare) or if the basket consists of items with a drastically different price ($10 and $1000 i.e.).

2. Is Price Index Then a Better Option?

It depends on what do you need, and how well do you understand the way in which prices work.

The price index is definitely a very popular price comparison method. It’s a far more complex method and not so understandable for end-users. It’s intended for pricing professionals – since it handles following situations in a much more flexible way

• it’s suitable for different product ranges
• handles well cases of products with large price differences

Yet, due to its complexity, it cannot be used for advertising purposes like the total basket value. 

What Method Do We Recommend?

The price index is definitely a more universal method, but the total basket is simper to explain to the end-consumers. 

Our answer would therefore be the following: any method can prove to be good, or wrong. The choice of method should primarily be based on your needs and goals. If a certain method did not work well, it only means that your goals were not adequately aligned with what the method has to offer. Therefore, it is crucial that you first understand your needs, and then, consequently, the right method will come as a logical answer.

But to make it easier for you, we have simplified the choice.

The question is – is your calculation intended for the broad public?

• Yes – you should go for Total Basket Value. End consumers won’t understand Price Index
• No – you should go for Price Index, it’s much more flexible than Total Basket Value

Whichever method you choose, you can definitely count on the help of Price2Spy since we cover both. If you still don’t have a clear picture of how this process should take place, we invite you to start a free 30 days trial and test everything out. 

Which price comparison method have you used so far? Let us know your experiences in the comments below.