The selling price, be that of a product or service, is the final price the customer or client pays.
It’s extremely important to offer the correct selling price because if you don’t make a profit while also securing a position in the market, your business will not survive.
In short, successfully answering the question of how to calculate selling price is a win-win for you and your customer:
They get a good deal, and you get a fair price.
For direct-to-consumer brands, there’s a chance you can charge more if your brand image is in high demand like many clothing brands do, such as Adidas or Nike, but you’ll need a strong portfolio to back up your prices or a ridiculously strong marketing campaign.
What is Average Selling Price?
The average selling price (or ASP for short) is the price you charge your clients for your goods or service.
So, regardless of if you sell an item with 10 SKU variants or 100, you calculate the ASP by looking at the total revenue earned from those sales and divide the amount by the total number of units sold.
It’s critical to calculate your average selling price as it allows you to monitor trends and make predictions on the marketplace. If you’re a start-up manufacturer, it can be a great way to determine a pricing strategy.
Cost Price Vs. Selling Price
Cost Price: The price 3rd party sellers pay and incur for purchasing items from a manufacturer.
Selling Price: The amount the 3rd party sells the item to their customers.
NOTE: If you sell directly to consumers, you’ll be looking at the selling price too.
How to Calculate Selling Price Formula
To cut a long story short, you’re always aiming to make a profit. Otherwise, your business won’t grow.
CP = Raw Materials + Direct Labor + Allocated Manufacturing Overhead
Let’s say the cost price of an item is $50. The short answer is you need to charge more than this figure to make a profit. However, a rule of thumb is to add a 25% mark-up – a technique known as cost-plus or mark-up pricing.
Your selling price formula will look something like this:
SP = CP x 1.25
SP = 50 x 1.25
In this case, the selling price would be $62.50. However, you need to consider other factors, such as:
Are you selling premium or value products; and
Your marketing tactics.
Types of Selling Price Calculations
1. Planned Profit Pricing
Planned profit pricing combines your cost per unit with projected output for your business. You can use it to work out if your business will be profitable at your current pricing strategy. If not, you can increase prices or increase output.
The flexibility makes it suitable for manufacturing businesses.
2. What the Market Will Bear (WTMWB)
This pricing charges the maximum (or very close to the maximum) for what the market allows. If an object costs $100 to manufacture, and the most a customer will pay for it is $500 — this is the market limit. This is a pricing strategy that can lead to very high-profit margins.
But beware – this is not a sustainable strategy – charging at the upper limits of what the market can bear leaves the field open for a wily competitor to undercut your prices easily. In short, it leaves you vulnerable to your competitors’ pricing strategy.
3. Gross Profit Margin Target (GPMT)
After you know how to calculate the selling price of a unit, you can work out the GPMT of your business. Say a company has $10,000 in revenue and the COGS is $6,000.
$10,000 minus $6,000 leaves you with $4,000 gross profit.
Dividing this with the original $10,000 leaves you with a gross profit margin of 0.4. Many manufacturing businesses aim for a GPMT of at least 20%, but this depends on your industry and costs.
You can use this metric to analyze progress to your ideal gross profit margin and adjust your pricing strategy accordingly.
Gross Profit = Total Revenue – Cost of Goods Sold
Gross Profit Margin = Gross Profit / Revenue
4. Most Significant Digit Pricing
This is why a retailer is more likely to price a product at $19.99 rather than $20.00. Customers are more likely to make a purchase when it is $19.99 because our brains tell us:
“This is less than $20.00 — it’s a bargain!”
Other industries tend to use this technique, such as those in real estate. You can try it yourself. Take the previous price of $62.50. Would $59.95 be the more enticing price that leads to higher profits?
How to Find the Best Pricing Strategy
If your pricing strategy and your competitor’s pricing strategy are the same then it’s like missing out on utilizing a useful tool.
Like it or not, customers infer a lot of information about your business from your prices.
Another thing: the results of price changes are not always linear. For example, a company could raise its prices by 1% and see overall profits increase by far more than that, even if demand remained the same.
The best strategy you can apply is a flexible one.