It's a well-known fact: businesses need money to survive.
Not only can it be spent on short-term business purchases, but it can also be used for long-term investments in the company's growth.
The primary way companies earn money is by selling their products or services. And about 75% of a company’s revenue comes from its standard products.
How you price these products can be a make or break decision for your business. The price should be high enough to cover production costs, but reasonable enough that potential buyers will be willing to purchase it.
But, what's the best way to calculate your product's selling price? Let's dive in and demystify the process.
The selling price is the amount a buyer pays for a product or service. The price can vary depending on how much buyers are willing to pay, how much the seller is willing to accept, and how competitive the price is in comparison to other businesses in the market.
Selling price can also be known as market price, list price, or standard price. And the following factors help organizations determine the selling price of its products:
The price a buyer is willing to pay
The price a seller is willing to accept
The price that's competitive in the market
Depending on the type of business and its offerings, it might prioritize one of the factors over the others. The average selling price of a product can also be used to determine the price you should assign your product.
Average Selling Price
Average selling price (ASP) is the amount of money a product in a specific category is sold for, across different markets and channels. It can be used as a benchmark for businesses who need to determine a selling price for its products.
For example, the average selling price for PCs is $632. Let's say you're trying to determine a price for your high-end, personal computer (PC). You'd likely choose to price your product above the average to stand out as a luxury PC provider.
When you're ready to calculate your product's selling price, a simple formula can be used.
Selling Price Formula
The selling price formula is:
Selling Price = Cost Price + Profit Margin
Cost price is the price a retailer paid for the product. And the profit margin is a percentage of the cost price.
Cost Price: The price a retailer paid for the product
Profit Margin: A percentage of the cost price.
How to Calculate Selling Price Per Unit
Determine the total cost of all units purchased.
Divide the total cost by the number of units purchased to get the cost price.
Use the selling price formula to calculate the final price: Selling Price = Cost Price + Profit Margin
For example, Hot Pie's Bakery Supply needs to calculate the selling price for its product line of bread machines. The business purchased 20 bread machines for $3,000.
Total cost of units purchased: $3,000
Number of units purchased: 20
Cost price: $150 ($3,000/20)
Now it's time to plug the numbers into the selling price formula. The cost price for each bread machine is $150, and the business hopes to earn a 40% profit margin. Here's what the formula would look like in action:
Selling Price = $150 + (40% x $150)
Selling Price = $150 + (0.4 x $150)
Selling Price = $150 + $60
Selling Price = $210
Now, Hot Pie's Bakery Supply has a selling price -- each bread machine will be sold to buyers for $210.
With the correct selling price, your business can earn a profit. To learn more about pricing strategies, check out this quick guide to cost-plus pricing next.
Originally published Apr 4, 2019 7:30:00 AM, updated May 13 2020