What is the Selling Price?
Selling price is defined as the final price in which a product or service is sold by the seller to the buyer. It is set by a contract of sale where the price is agreed upon by the parties involved in the contract. Generally, the selling of price is determined by three key factors: the price a buyer is willing to pay; the price a seller is willing to receive; and the price which is competitive in the market.
The selling price is different from the cost price. Cost price refers to what the cost company pays the supplier to produce or purchase a product, component, or raw materials. Both selling price and cost price matter in determining profitability in a business. Companies should not price a product lower than their cost price because it will cause a loss.
Different Ways to Describe Selling Price of a Product
There are several ways of describing the selling price of the products. These are several methods used to price a product:
1. Cost-based pricing
In cost-based pricing refers to setting a product pricing that is based on these following aspects:
- A profit percentage with product cost
- Add a percentage to an unknown product cost, and
- Blend total profit and product cost
2. Competition-based pricing
In the competition-based pricing, there are three focuses and goals to pursue, including:
- Price is the same as the competition
- Setting the price to increase the customer base
- Seeking larger market share through price
3. Customer-based pricing
Customer-based priced is driven by these following things:
- Using price to support and improve product image
- Setting price to improve product sales
- Designing a price range to appeal to different types of customers group
- Setting price to increase the volume sales
- Setting the price of a bundle of products to reduce inventory and to attract customers
How to Determine the Selling Price
There some ways in determining the selling price, including analyzing the prize sales history to have a better understanding of the market demand. Another way to describe it is by using formula. These are formula to determine the selling of price by using the gross profit formula. The gross profit formula is selling price – cost price = gross profit. It helps a business to set the selling price based on the expected profit percentage. For example, a product costs $5 and the company wants to make a 20% profit. Let’s see the calculation below to find the selling price.
Selling Price – Cost Price = Gross Profit
SP – $5 = 20% of SP
1 SP – $5 = 0.2 SP
1 SP – 0.2 SP = $5
0.8 SP = $5
0.8 SP/0.8 = $5/0.8
SP = 6.25
From the calculation above, in order to make a 20%, the selling price will have to be $6.25.
It is important to note that when determining the selling price, you need to know the cost price and how much profit you want to make. Make sure to set the selling price no lower than the cost price to keep your business at profits and not a loss.
