How Do You Determine The Selling Price Of A Product?
- Setting the right prices is a juggling act for your goods.
- A low price is not always desirable, as without turning any profit, there is no point in setting up a business.
- Similarly, a retailer can see fewer sales and "price out" more budget-conscious clients if a commodity is a high price, losing market share.
- Each small company will have to do its homework.
- Factors such as manufacturing and business costs, sales targets, and competitor pricing have to be weighed by retailers.
- And then, it isn't just pure math to set a price for a new product or even an existing product line.
- In reality, that may be the process's most straightforward move.
- That's how numbers treat themselves in a rational way.
- On the other side, people, well, we can be way more difficult.
- Yes, it's mathematics to be done!
- The art of pricing often allows you to measure how much human activity affects the way price is viewed.
- You would need to analyse various pricing methods, their psychological effect on your clients, and make your decision from there in order to do so.
- To succeed, companies need money.
- It can be spent on short-term business acquisitions and can also be used to make long-term investments in the development of the company.
- A make-or-break choice for your company may be how you price these goods.
- The price should be high enough to cover the cost of producing, but fair enough for prospective customers to be willing to purchase it.
- But, what's the best way of measuring the sale price of your product? Let's have a deep breakdown of this mechanism.
What is the selling price?
Market price, list price, or standard price may also be known as the selling price.
- The sale price is the amount paid for a good or service by a customer.
- Depending on how much buyers are willing to pay, how much the seller is willing to accept, and how competitive the price is compared to other companies on the market, the price can vary.
- The following variables help companies assess the selling price of their goods:
- The price that a consumer is willing to pay
- The price that a seller is prepared to accept
- The price on the market that's competitive
- It is one of the most significant factors for an organisation to decide.
- It is important because the success of its survival can be defined by it.
- The price of a product has a direct impact on its sales.
- To make a profit, how much you sell something for must be enough.
- It must also secure a market position.
- However, one must not confuse selling price with cost price.
- Let's get some clearance on both these terms.
Selling Price And Cost Price Analogy
- The cost price is what the company pays to manufacture or purchase a product, part, or raw material from the supplier.
- In accounting, as the name suggests,' cost price' is a cost, i.e., the capital a company uses to produce something.
- In accounting, in monetary terms, we express costs.
- Selling and cost rates matter when assessing profitability in a company.
- If a business has a lower selling price than the cost price, it will then make a loss.
- In certain cases, to be able to compete successfully in the marketplace, firms will have to lower their prices.
- The marketplace implies the same as the abstract sense of 'business' in this context.
- If the sale and cost price are almost the same, the company may even split.
Selling Price Formula
- As described earlier, the profits of an organisation highly vary according to the selling price of their product.
- More the selling price, the higher the profit rate.
- The correlation between the selling price, cost price, and the profit margin can be interpreted by a formula which is:
Selling Price = Cost Price + Profit Margin.
- With a proper profit margin input expected by the retailer, you can easily calculate your selling price.
- Let's get an example for better understanding:
A sewing machine vendor has to calculate the selling price for its product line of sewing machines. The business purchased 30 sewing machines for $3000.
The total cost of units purchased: $3000
Number of units purchased: 30
Cost price: $100 ($3,000/30)
Now it's time to plug the numbers into the selling price formula. Each sewing machine's cost price is $100, and the seller hopes to earn a 30% profit margin.
Therefore, Selling Price = $100 + (30% x $100)
Selling Price = $100 + $30
Selling Price = $130
The selling price determined is hence $130 per sewing machine, and thus the seller gets a 30% profit in the business. However, the selling price must be around the product's average selling price at that definite time period.
What Is The Average Selling Price?
- The word average selling price (ASP) means a particular price at which such products are sold.
- The product form and product life cycle influence the average selling price.
- It is the amount of money that a commodity is sold for across various markets and networks in a given category.
- Companies who need to set a retail price for their goods can be used as a benchmark.
- From product to product, the ASP can differ.
- Typically, products such as jewellery and electronics have a high average retail price.
- On the other hand, books, CDs, and DVDs seem to have a low average retail price.
- For businesses, the ASP normally suggests which marketing strategy a business can follow.
- In reality, in designing a marketing plan, it may even be the primary factor.
- For example, People generally use the words Average Daily Rate or Average Room Rate in the hotel and lodging industry.
- The ASP is not the same as the 'sale price.'
- How much a business sells something for or how much clients pay for it is the selling price.
- For a given duration, there is no set of prices to measure an average.
- A fixed time is not specified in the sale price.
- The estimation of the ASP provides many advantages.
- The key benefit is that sellers are able to assess when demand reacts best.
- Another benefit is that it enables the margin to be calculated by us.
- It can also help us decide how to impact the margin.
- Margin refers to the difference between the cost of purchasing or manufacturing something and its sale price in this case.
How To Calculate ASP?
- The ASP estimation is equivalent to any question correlated with an average.
- To calculate the overall sale price, you need to compile a compilation of prices and count them all.
- Then, by the number of products you have received, you split the sum.
- Let us get the sewing machine example back for simplification.
- So, let's say you're receiving sewing machine prices according to five vendors.
- You have to add up the prices to determine the average price and divide it by 5, as shown,
$100 – $110 – $120 – $120 – $130 = $580
Divide the total by 5 (the total number of prices).
580 ÷ 5 = $116
The average selling price is $116.
- However, certain price points may be too high or low for comparison.
- This can produce an inaccurate or skewed metric later on.
- Thus, you need to analyse the data properly according to an average price followed by the market incurring remarkable profits.
- The average sale price helps to get rid of the distortion that only a few consumers who order immediately at launch have to pay for carrier discounts and inflated MSRP.
- Instead, ASP illustrates the "real" price manufacturers get for their phones, making it easier to compare true costs.
- Along with all this, it is also important that you see at what price your competitor is selling the same kind of products for.
When to Hike Prices?
- Observe and experiment.
- You could try increasing the prices for a certain period and offer a bonus.
- Increasing the prices is important to stay in the game.
- Learn and observe how the market responds.
- Hope this article will give you clarity and guidance. Good luck!