The first thing any business owner or a merchant learns entering the market is that price is never just one particular number.
Price is actually such a multileveled matter that, in many ways, sound price management determines the overall success of the enterprise. And from this point, the difference between net price and list price and balancing between them is the primary skill for any merchant.
However, there is a pretty common belief on the modern market that most businesses don’t really feel the difference and impact of the correlation between the list and net prices.
In fact, due to the constantly rising competition in every niche and considering the fact that most of the market has recently moved to the e-commerce dimension, where a customer has more opportunities to compare prices and make decisions on the spot, even the slightest strategic move in this field can become a huge advantage in front of competitors.
In this article, we shall discuss the true meaning and difference between net price and list price and explore the tools, possibilities, and benefits of their sound correlation for your business.
What is the list price, and why does it matter?
You may call list price the “Headline” price. It is the amount of money a customer is supposed to pay for the product or service before any possible discounts. In other words, a list price is the highest possible price a customer would have to pay if he buys from you.
What is the meaning of a list price for your business?
List price is based on two primary factors:
- The costs of a particular product or service development for your business;
- The average price for the product’s or service’s analogs on today’s market.
That is why the list price has another name: Manufacturer’s Suggested Retail Price (MSRP). Its main purpose is not just to cover the manufacturing and development costs of the product but also to generate profit – the main purpose and final goal of any enterprise.
While entering the market or introducing a new product, many businesses prefer to stick as close to their List Price as possible, considering it the main guarantee of stable profit from sales.
However, this principle works only in the following cases:
- Your product or service indeed has no analogs on the market;
- The demand and value of your product or service are so high that customers don’t expect any kind of discounts, bargains, or sales.
In fact, there are several brands, particularly in the luxury segment, that have adopted such pricing policy and even made it their distinctive feature on the market.
However, the market is changing and developing, constantly offering customers new options every day. Therefore, no brand, whether new or a well-established one, can exist in a vacuum on the modern market.
This is where the true nature, purpose, and significance of net price become apparent.
What is the net price, and why does it matter?
Net price for your product and service is the final and actual price a customer would pay after all the discount and promo reductions.
As a matter of fact, most sales that any business does happen according to the net price simply due to the way the modern market operates. Any deal made today considers wholesale channels, promos that help to introduce a new product on the market, seasonal and other discounts for customers, etc.
Why does net price matter?
The profit margin is directly related to the company’s price management. The correlation between list price and net price determines whether the business will turn a profit naturally, being a full-fledged competitor, or struggle, altering its reputation in the eyes of customers and business partners.
While sticking as close to the List Price as possible might seem like a win-win situation. The modern competitive market, especially the e-commerce pricing segment, sets the stage where competitors can easily undercut your company’s list price and perform much better for prosperous customers as well as retailers and business partners at the same time.
How can a business align net price and list price?
Proper pricing is a significant yet tricky matter for most businesses. It depends on several objective factors such as:
- Cost of materials, labor, development, etc.
- The expected revenue from sale
- The desired profit
At the same time, a business should consider pretty variable and subjective matters such as:
- The uniqueness of the company and products, and its value for customers
- Alleged competitors` moves
- Long-term perspectives of the product’s relevance
In many cases, the ability to reduce the price tag and set the proper net price is the only tool that allows businesses to remain competitive on the market overflown with analog products.
To utilize this tool properly, a business should:
- Study the prosperous customer in real-time. It is not enough just to determine the target auditorium. While the world is changing, altering people’s consumers’ force due to economic crisis, social unrest, the recent Pandemic, etc., it is essential to know how your customers and their habits change in real-time, adapting to the ongoing situation. That way, you don’t only offer them a product that serves as a solution but set the net price that meets their capabilities and expectations;
- Establish contact with distributors. Mutually beneficial work with distributors is the key to successful sales. Through negotiation with them, you will manage to set a fair net price that will correspond to the market’s environment and your own expectations from the sales;
- Calculate overhead and cost-plus pricing carefully. To understand the possible ratio between the list price and the net price, make sure that you make a list of all the manufacture and development costs, set your profit expectations, and consider the competitors` prices that are based on the same calculations.
- Never provide tools for competitors. Price management failure is the most powerful tool for your competitors. While setting the prices, it is essential to consider the existing analogs on the market as well as constantly study the market playfield recognizing prosperous competitors before they become visible and tangible for your customers.
How to calculate the net price properly
Technically the difference between the list and net prices is the difference between how much a product or service should cost “in a vacuum” and how much they would cost considering all the inevitable factors such as rebates, discounts, taxes, etc.
Your final customer has no idea about the list price and its roots. Therefore proper calculation of net price is not only a competitive option for the business but its primary way to communicate with consumers.
Here is the fundamental principle that will help you set a beneficial and competitive net price:
- Make a list of all the costs and overheads of the product manufacture;
- Consider the desired profit from the sales – you have got your list price;
- Subtract any discounts you would have to or willing to make such as wholesale, loyalty discounts, etc. – that is your preliminary price;
- Apply all relevant taxes and fees that will influence the cost. Those may be legal fees as well as transportation, installation fees, etc.
As a result, a net price formula looks like this:
Net Price = List Price – Discounts + Sales Tax + Fees
Suppose you have determined the List Price of your product as $1000. Selling to a wholesale or loyalty customer, you can offer a $10 discount. Your local government has set a 6% Sales Tax and a $10 fee for related waste recycling.
According to the formula listed above the figures are:
Net Price = $1000 – $100 (10%) + $54 (6% Sales Tax) + $10 (Recycling Fee)
Net Price = $964.
The price management of any business depends on the demand for the given product, costs of its manufacture and development, and competitors` activity on the market.
Theoretically, List Price provides the highest profit rates as it primarily considers your company’s interests. However, proper net price settlement provides a business a powerful competitive tool once analog goods arrive at the market or your business itself is the market’s novelty that offers a variant of an existing product at a reasonable price.
Technically, discounts that you are ready to offer your customers are the only variable magnitude in the formula as all the others are imposed by the market circumstances or legal obligations.
pIn this matter, it is essential to use this tool properly and offer discounts that would be attractive for customers but keep you in a reasonable price range. Once you remain in the high-end segment, your competitors get a chance to beat you easily through lower prices. At the same time, sticking your prices to the lowest segment does not provide you enough space for maneuvering, which is crucial for certain market segments such as seasonal goods and services or a dynamically changing market where trends rotate rapidly.pricing terminology