What is the selling price? Definition and examples
The Selling Price of a product or service is the seller’s final price, i.e., how much the customer pays for something. The exchange can be for a product or service in a certain quantity, weight, or measure.
It is one of the most important factors for a company to determine. It matters because it can define the success of its survival. A product’s price has a direct effect on its sales.
Setting the right selling price involves careful consideration of market conditions, production costs, and the perceived value to the consumer.
How much you sell something for must be enough so that you make a profit. It must also secure a position in the market.
We can set that price at a minimum, maximum, or the average of both. We can establish prices according to the time of year or season, area, demand, and market. It is also a good idea to look at what our competitors are doing.
Regulations and national or local laws may affect selling prices.
Merriam-Webster defines the term as “The price for which something actually sells.”
The term contrasts with the average selling price or ASP. The ASP tells us the average price that companies sold something for. To calculate the ASP you gather several prices, add them up, and then divide the total by the number of prices.
Selling vs. cost price
It is important not to confuse the term with ‘cost price.’ Cost price is what the company pays the supplier to produce or buy a product, component, or raw material.
As the name suggests, ‘cost price’ in accounting is a cost, i.e., the resources a business uses to make something. In accounting, we express costs in monetary terms.
When determining profitability in a business, selling and cost prices matter.
If a company has a selling price lower than its cost price, it will subsequently make a loss.
In some cases, companies may have to lower their prices to be able to compete effectively in the marketplace. In this context, the marketplace means the same as the abstract meaning of ‘market.’
When the selling and cost price are nearly the same, the company may break even. To break even means to neither make a profit nor a loss, i.e., a profit of zero.
Determining the selling price
There are several ways to determine the selling price. One way is by analyzing the price sales history.
This allows a business to understand demand better. It looks at different periods or seasons and sets prices accordingly.
Another way is through formulas (formulae is another plural of formula).
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Gross profit formula
For example, the gross profit formula is selling price – cost price = gross profit. It can help a business set the selling price according to the percentage of profit it expects.
Let’s suppose a product costs the company $10 and it wants to make a 20% profit? Its selling price will have to be $12.5. See the calculation below.
Selling Price – Cost Price = Gross Profit
SP – $10 = 20% of SP
1 SP – $10 = 0.2 SP
1 SP – 0.2 SP = $10
0.8 SP = $10
0.8SP/0.8 = $10/0.8
SP = $12.5
($12.5-$10) /$12.5) to get the wanted gross profit (20%)
Understanding the elasticity of demand is also crucial, as it determines how the quantity demanded will respond to a change in price, allowing companies to optimize their pricing strategies.
Understanding “Selling Price” in Different Contexts
The term “selling price” is versatile and appears across various contexts within business and economics. To understand its range of uses, consider the following sentences which illustrate how the term can be applied in different scenarios:
- “The selling price of the property exceeded its initial valuation due to the competitive bidding war that ensued.”
- “After accounting for production costs, the company set a competitive selling price to enter the market.”
- “During the clearance sale, the selling price of the merchandise was significantly lower than the original price tag.”
- “The selling price listed on the stock exchange reflects the current value at which the stock is being traded.”
- “A thorough market analysis helped the startup determine the optimal selling price for its innovative tech gadget.”
- “The retailer adjusted the selling price for the holiday season to attract more customers.”
- “To maintain profitability, the selling price of the handmade jewelry had to incorporate both the cost of materials and the artisan’s time.”
Video – What is Selling Price?
This video, from our YouTube partner channel – Marketing Business Network, explains what ‘Selling Price’ means using simple and easy-to-understand language and examples.