Whether you are a pricing specialist at an enterprise or an SMB owner, deciding on the price of your products is the single most important factor that keeps your business healthy. Selling price, as the name suggests, is the amount of money the customers pay for purchasing the products or services. Since the price of a product undergoes several steps before reaching its selling price, it is quite different from the product’s manufacturing costs by nature. Let’s see how this affects your business’s profits and competitiveness.
The selling price of a product changes several times during its life cycle. First, brands need to manufacture the product at a cost, and then the cost of the added attributes that come with the product is added to its production cost. After the sum of this process, the resulting price is called the reference price, which is the minimum price that local and international merchants, retailers, and resellers can offer customers. Of course, retailers would like to make profits and cover their costs as well, so they set the price above the reference price, and this price is now the list price and the first selling price of the product. But be careful, there is an important difference there, though.
What is the Difference Between the List Price and the Selling Price?
List price is the first undiscounted price that merchants first put their products on the market. However, the selling price depends entirely on the product’s competitiveness and performance. Let’s say you are a beauty brand that successfully launched a lip product line that the demand goes over the roof, what would you do? The selling price increases, right? Since there is demand, you would be able to sell your products at a much higher price point.
On the other hand, you have a product that couldn’t fully meet customers’ expectations for some reason, whether it’s performance or because your competitors have better options at a much lower price point. You would have to create a discount, and the selling price would go lower. To sum up the point clearly, the selling price, or, as it is traditionally called, the price, is what customers see on the price tag, and the money they pay at the moment to acquire the product or service. Let’s put our assessments in formulas.
Formula for Selling Price:
The formula heavily depends on the desired profit margin. If we want to put it basically, it would be adding the desired margin percentage to the production cost. But, as we explained, there are other factors influencing the outcome, creating a difference between the list and the selling price, such as:
If there aren’t any kind of discounts or adjustments:
The Selling Price = List Price
When discounts are applied:
The Selling Price < List Price
When the customer demand exceeds the initial price:
The Selling Price > List Price
How to Determine the Selling Price of Products?
There are almost countless pricing strategies and price points that merchants can use to set their selling price. It depends highly on the brands’ current business strategies. The aim here is to choose the sweet spot that will positively affect your business’s profit margin. After deciding your product prices, you need to continuously track competitors, test, and refine your strategies accordingly to maintain competitiveness. Let’s go through some examples on how to use the selling price to convey your pricing strategy to the customers.
Practical Examples
For example, your company might want to penetrate a market at a slightly lower selling price, so you need to implement a penetration pricing strategy for a selected group of products. On the contrary, you might want to skim the market at the list price for a while, as technology brands like Apple and Sony often do to take advantage of the power of the newly introduced products. Technology customers are highly willing to pay high prices for these products to acquire them first.
As another example, if you want to implement a discount, your selling price would completely differ depending on whether your brand intends to use price anchoring, product bundling, seasonal offers, or limited discounts to foster customer loyalty. This mix-and-match of different pricing strategies helps companies determine the best price points and selling prices for their products.
Conclusion
Selling price is not a one time decision since sticky prices hurt your business’s revenue; you need to keep it dynamic according to your customers’ expectations, market demand, and business goals. To keep your business on top of its game, you need to always focus on your products’ or services’ value, how much your customers are willing to pay for them, and how intense the competition is, since the selling price will reflect these factors. Also, competitive pricing analytics helps you to determine the positioning of your items in the market and set the right selling price, while still generating a profit through precisely monitoring competitors.
