Price analysis is the process of determining if the price of a product or service is reasonable. Factors that could make prices unreasonable include a low level of competition, a company's costs being too high or the supplies being limited. A price analysis is generally done by comparing the prices of similar products or services within the industry. In markets with low price competition, the analysis can be conducted with historical price records, estimates of cost to determine the markup and quotes from different vendors. Conducting a cost analysis along with the price analysis can help determine why a company is asking a particular price.
Some purposes of conducting a price analysis include analyzing how a product is positioned amongst its competitors, determining if a different pricing strategy should be used or comparing prices with customer perceptions. Regularly performing a price analysis can help a business better understand how it is viewed through its customers' perceptions, such as having too low of a price or producing products of poor quality. This could move the business into taking action by developing a new marketing strategy and augmenting its price. Also, if other businesses are producing higher quality products and selling them at lower prices, then the business may need to evaluate and reduce its costs in order to better compete.
A price analysis is conducted by comparing prices with competitors, published price lists, quotes from different vendors and bids from suppliers. The analysis is especially easy when the market is highly saturated with competition or when there are many vendors from which to choose. It is important to only compare products that are similar and take into account any differences in features, technologies or branding. Even though two products may be exactly alike, the one with a strong brand name may be able to carry a higher price since it is recognized and trusted by consumers.
If a comparison cannot be done, then the business can conduct a cost analysis instead, which is based on the costs of materials, labor, tools and other expenses associated with the production or manufacturing of the product. A cost analysis can also be done for services if no other agencies or businesses offer similar services. Another method is to conduct a price analysis based on historical prices for the company to see if there are any trending differences over time. This method should only be used sparingly, however, as there is no guarantee that the business ever offered fair pricing or managed its costs well.