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 is important because it can define the success of its survival. A product’s price has a direct effect on its sales.
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).
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%)