Selling price is defined as the price at which a particular commodity, product, goods, or service is sold to the buyer by this weather. Generally selling price is expressed as currency units. It can also be defined as the market with you or the exchange value that is agreed by both seller and buyer, which helps the buyer to buy goods or services from the seller. Selling price is also known as a list price, market price, sales price or quoted price.
These terms are used in multiple industries for multiple products. For example, the list price is the minimum selling price of the product with minimum expected profit margins, Sales Price is the selling price, but it can be a minimum selling price or retail price, on the other hand, the quoted price is a kind of selling price which has a scope for negotiation.
The Selling price of the product depends on the contract. Usually, the selling price is agreed upon by both parties before the agreement is initiated. The selling price is also understood as the exchange price of the product. Negotiation usually happens at the selling price between the buyer and the seller. The profits of the seller depend on the selling price. If the selling price of a product or service is lower than the cost price, then the seller may not make any profit but instead will incur a loss.
No organization will be willing to work with a loss in selling a product, and a decent profit margin is expected for every product. There may be times when there would be a loss on the product due to unexpected factors, but frequent losses would be undesirable by the organization. This is why the selling price of the product matters when it comes to the success or failure of a product. Determining the selling price of the product is half the battle won.
Three factors on which the selling price of a product depends, which are as follow
1. The amount that the seller is willing to get
The minimum price that the seller is ready to get includes his minimum profit margin. In some cases, the minimum profit margin may be reduced or increased depending on the customer and the type of the deal.
2. The price that the buyer is ready to Pay
The price of the buyer is always lower than that of the seller, and this is true, especially in the case of products that have fluctuating and flexible pricing. Negotiation and bargaining play an essential role in this case.
3. The price that is considered competitive in the market
This price depends on competitor products and the general market trend. If due to any unforeseen circumstances, the selling price of a commodity falls above the usual market average, then the other sellers follow the same suit and the average price comes down. This is true, especially in the case of commodities.
How to Determine selling price?
It is crucial to understand how a selling price determined. The selling price of the product depends upon various factors. Multiple factors are in the world when it comes to pricing the product like the cost of the product, cost of the competitor product, Market average and expectation of the customer.
Sometimes geography is also considered while pricing the product like the average income of the people and their affordability.
Following are a few of the standard methods to determine the selling price of the product:
1. Cost-based Selling price
The cost-based selling price is one of the pricing methods in which the company determines the selling price of the product by adding the profit element. In this type of method of the selling price, the profit element is added either as a percentage of the final price or as a fixed amount. This amount or percentages separate from manufacturing cost.
The cost of a product is $300.
The profit percentage expected is 30%
Therefore the selling price of the product would be
Total cost + Profit percentage
300 + 25% (300) = 375
The final selling price of the product is $375.
The primary advantage of cost-based pricing is the profit margin remains the same irrespective of the fluctuations in the affecting factors like availability of raw materials, increased manufacturing costs, and other variables.
2. Competition based Selling Price
The selling prices of competitor products are used as a basis for the pricing of the product. Market information is used to determine the pricing of the product. Since the selling price of competitors is used as a benchmark, the business may charge its product lower or higher depending on the demand from the customers and the profit margin per unit product.
In a perfectly competitive market theoretically, sellers have no control over the selling price of their products. The pricing of the product depends entirely on the supply and the demand. A primary advantage of having competition based selling price is that there is no requirement of complex calculations.
The market price is available, and the seller has to follow and calculate their selling price with possibly adding a small amount of margin. Bulk deals are usually profitable from the seller‘s point of view in competition based setting priced products.
3. Customer-based Selling Price
The standard method used in the pricing of the product is the customer based price. In this, the companies the first size of the customers and predict the probable amount that the customers are willing to pay. Usually, car dealers use this approach. Negotiation is an essential factor that is involved in a customer-based selling price. There is flexibility available when used the customer based selling price.
Different customers can pay a different amount for the product, and it is up to the salesperson to negotiate and get the best possible for the product. It may be possible for a company to achieve high profit it’s with this approach. One of the primary disadvantages with customer-based selling price is that if a customer who has paid a higher price for the product interacts with the person who has paid less expense for the product and comes to know he ended up paying a higher price, then the possibility of repeat business from the earlier customer is lost forever.
This discriminatory based pricing of the product can affect the market negatively in the long run, and it is always desirable to have a fixed price for the product so that there is no discrimination between the customers.
Use of Selling price in the calculation of Profit and Loss
In the concept of Profit and Loss, the selling price of the product plays an important role. This can be illustrated from the following formula’s:
Profit = Cost price – selling price
Wherein the cost price of the product is the price at which the product is manufactured and procured by the organization or the seller. The cost price can be different for different elements in the transaction.
For example, an organization manufactures a product at $100 and has a fixed profit of $15 per product. Therefore the selling price and of product to the buyer are $115. This buyer, if a customer, then the transaction is over, but as in the case of most businesses, the middlemen are the buyer who then further sells the product to the customer.
Therefore the Cost price of the product is $115 for the buyer, and when he sells the product to a customer, he will add his profit margin of say, $5 per product. In this case, the selling price of the product is
115 + 5 = $120
But if the product is sold at $110 by the middleman, then he sold it at a loss of $5.
In most of the organizations, profit and loss are calculated as a percentage. It can be calculated as follows:
% profit = [(Profit * 100) / cost price]
Similarly, % Loss is calculated.
Thus selling price has a significant role in calculating profit and loss for the organization and the success or failure of a brand or product.