How to Calculate the Selling Price of a Product?

An appropriate selling price is the key to success for any business, as it impacts a company’s profitability, revenue, market positioning, customer perception, and competitiveness.

If you set your prices too low, you will miss out on valuable revenue, and your product will be considered low-quality. On the contrary, if you keep the prices too high, you risk missing out on valuable sales. Therefore, here comes the million-dollar question: How do you calculate the selling price of a product?

Various factors need to be considered when setting a product’s selling price. This involves determining the right balance between cost incurred, customer perception, and market trends. Pricing is more than just a figure; it presents the value your business offers, showing tangible elements such as production costs and intangible components like your brand’s positioning in the market.

In this blog, we will help you find the best pricing strategy for your business by explaining the selling price, how to calculate it using the selling price formula, and examples of how you can use those formulas for different applications. So, let’s get started!

Defining Selling Prices in Business

A selling price is the amount your customer has to pay for the product or service you offer, either online or offline. It can also be referred to as the list, market, or standard price. 

Determining the right selling price is essential for a business to reach a set profit margin. Prices are decided by considering a few factors, such as how much customers are willing to pay and how competitive the price is compared to others in the market. 

Remember, the selling price you decide should eventually be a good deal and offer value to your customers. 

A Guide to Calculating Selling Price

Let’s understand how to calculate the selling price of a product and what elements to consider while deciding the final price.

The first thing to consider when calculating the selling price is the pricing of your competitors with a fair market share in the industry. Another important factor is the cost of production. If the production cost is high, you will have to charge more to make a profit.

Other aspects to consider while setting your selling price include shipping, handling costs, labour costs, taxes (if any), fixed costs, variable costs, and additional overhead. Also, do not forget to consider your target audience’s preferences and purchasing power before finalising the selling price of your product.

Here is how to calculate the selling price of a product. First, you need to calculate the cost price using this formula.

Cost Price = Raw Materials + Allocated Overhead of Manufacturing + Direct Labor

Divide the cost by the total number of units purchased to obtain the cost price.

Selling Price = Cost price + Profit Margin

Different Approaches to Calculating Selling Price

Here are a few approaches to calculating the selling price:

1. Cost-based pricing

It is one of the easiest ways to calculate the selling price. In this method, you first need to add a desired profit margin to the cost of goods sold (COGS). Here is the formula for the same:

Selling Price = Profit Margin + COGS

If you use cost-based pricing, you must include all the costs incurred in manufacturing the product, such as rent, wages, raw materials, operational costs, transportation, advertising, and machine wear and tear. This ensures that your cost-based pricing is accurate. 

Once you calculate the expenses, you can select from any of the three cost-based pricing approaches.

2. Mark-up pricing

This strategy is easy to implement and is used by businesses that offer multiple products. The profit level is expressed as a percentage to calculate the selling price and added to the production cost.

Let us understand this with an example. A cheese manufacturing company creates four types of cheeses. The production cost is $2 for 100gm of cheese. They wish to keep a 30% profit, which means the selling price will be $2.60 at the retail market.

3. Cost-plus pricing

It is quite the same as mark-up pricing. The profit is not calculated in percentage; rather, it is a fixed number. Businesses whose manufacturing cost is uncertain or fluctuates frequently opt for cost-plus pricing. This means that your profit will not be hampered even when the production cost rises.

Here is an example to understand this pricing concept. If your total costs are $100 and you want a 20% profit margin, you would add $20 to arrive at a selling price of $120.

4. Planned-profit pricing

This pricing approach ensures that your company achieves a total profit. To calculate the price of the product, you need to subtract per-unit expenses from output predictions. In this case, the pricing is determined using the break-even approach. It helps producers determine how increasing output levels will affect the product’s pricing.

For example, a burger chain sets prices based on the order they receive. The customer gets a discount if the order is for more than ten burgers.

5. Competition-based pricing

In this method, you price your products based on the competitor’s pricing. This approach is used by businesses that create a product very similar to the competitors. However, it is recommended that even if you follow your competitor’s pricing, you should still determine the costs of manufacturing your goods.

It is essential to know everything about your competitors, as the more you know the details, the higher the pricing accuracy.

6. Customer-based pricing

This method lets you keep the selling price as per the customer demand. To use this approach, it is important first to know how customers perceive your products, their purchasing pattern, trends, and buying decisions. Once you know everything about them, it becomes easier to price your product accordingly.

7. What the Market Will Bear (WTMWB)

This pricing strategy is the most beneficial for businesses as it allows them to charge the maximum price for what the market allows. For example, if your cost is $50 and the maximum a customer can pay is $300, you can price your product at $300.

This is quite profitable, but remember that it is an open market, and any competitor can easily undercut your prices, so you will have to price accordingly.

8. Gross Profit Margin target (GPMT)

This can be a great pricing method for your business if you have diverse product classes. This technique makes it easy to maintain a specific margin across every product category. The gross profit margin is the percentage of sales revenue remaining after deducting the cost of sales and manufacturing.

You can use this formula to calculate the gross profit margin.

Gross Profit Margin = Gross Profit/Revenue

9. Most Significant Digit Pricing

It is also called psychological pricing because you use psychological tricks to make your customers perceive your product as more or less valuable. For example, customers are more likely to purchase when it is $9.99 because our brains tell us that it is less than $10.00. It’s a bargain.

10. Penetration Pricing

This pricing is used mainly by businesses entering a new market, keeping the price relatively low. Their main goal is to attract more customers; they can raise the prices when they reach a sizable audience.

Penetration Pricing formula:

Selling price = Cost of goods sold + (Market share * Target profit margin)

11. Skimming pricing

This pricing is used by people who enter the market first and take the first-mover advantage by charging high. As the product is new and exclusive, and there is no competition, it will provide them with a clear and straightforward path to success. 

However, when the competition rises, you need to change and bring down your selling price accordingly.

Examples of Selling Price Calculation

By now, you very well know how to calculate the selling price of a product. Let’s understand this through practical examples:

• Example 1: Calculating the selling price for a wi-fi subscription 

A small wi-fi company offers monthly subscription services to its customers. The accountant is responsible for providing financial insights and overseeing the management of financial records. 

The accountant starts by calculating the selling price to find the ideal starting point for the yearly wi-fi subscription by first finding the total cost of providing the service.

He must calculate the following expenses before finalising the selling price for the wi-fi subscription:

• Wi-Fi cost- $500/ box
• Marketing expenses- $2000/month
• Internet cost- $10,000/month

He can easily find and multiply the total costs by the desired profit margin of 30%. Using the formula, the accountant calculates the selling price:

Selling price = (cost) + (profit margin) = ($12,500) + ($3,750) = $16,250.

This selling price represents the total amount they must charge for monthly subscriptions. Then, this amount should be divided by the number of clients the wi-fi service provider currently has to get an idea of the price for a monthly subscription. If the provider presently has 5,000 clients, thus, the monthly fee should be ($16,250) / (5,000) = $3.25.

At this point, the accountant can recommend the company to set the selling price of a monthly subscription to $3.25. 

• Example 2: Calculating the Selling Price for Bags

A medium-sized retailer purchases bags for resale. The company wants to analyse the appropriate selling price for its most trendy duffle bags. This is how they can determine the price, assuming every duffle bag has a cost of $10 and the company has a desired profit margin of 25%. They can calculate the selling price using this formula:

Selling price = (cost) + (profit margin) = ($10) + (.25 x $10) = ($10) + ($2.50) = $12.50.

Exploring the Concept of Average Selling Price (ASP)

An average selling price is the average revenue earned after selling a particular number of goods. This metric is greatly affected by the product type and its life cycle. Businesses use it to evaluate their pricing strategy and performance. 

It states the average price at which a product or service is sold over a specific period. It is computed by dividing the total revenue generated from sales by the total number of units sold. The formula for calculating ASP is:

ASP = Total revenue from the sale of a product/Number of products sold

Utilising Average Selling Price Effectively

To use average price effectively, businesses need to consider the following tips:

1. Create a market entry strategy

If you are new to the market, you must determine the average product’s selling price. Based on the ASP, high pricing can give your company the appearance of premium products, but remember, this higher cost can lead to fewer sales. On the contrary, if you set your cost below the ASP, your company might sell more but deal with smaller profit margins. Therefore, you will have to create the strategy accordingly.

2. Identify Trends

Using ASP can make it easy for your business to identify market trends. For example, a toy company sold cars for $15 and sold 100,000 cars in a month, but by dropping the price to $12.50, they were able to sell 1,50,000 cars. Although the company decreased the prices, this incentivised more customers to make a purchase and led to an increased profit.

Thus, identifying such trends makes it easier to reach new and existing customers and increase sales.

3. Make conclusions about products and services

Should you continue with the product or drop it? Analysing the ASP helps make this decision easier for your company. If you reduce your selling price due to the ASP but still see a fall in sales, it is time to pay attention and evaluate whether you need to create a strategy for that product or drop it.

Calculating Average Selling Price: Techniques and Tools

Let us learn how to calculate average selling price, as it is an important aspect that enables businesses to monitor trends and make predictions on the marketplace. The average selling price formula is mentioned below:

Average Selling Price = Total Revenue Earned by a Product ÷ Number of Products Sold.

Let us understand this with the help of an example-

Let’s say you own an online store that sells soaps. In a month, you sold 500 soaps, generating a total revenue of $1,500. Now, if you want to compute the ASP of soap, you must divide the total income of $1,500 by 500 soaps, getting an ASP of $3 per soap. This means that, on average, each soap was sold for $20 during that specific period.

Determining the Suitability of Average Selling Price for Your Business

Running a business requires critical thinking and the ability to make well-informed decisions. Another important element to making your business thrive is determining at what price you should sell your product to yield higher profits. 

You must consider the following factors to determine the suitability of ASP of your products:

• Sales amount: The sales volume is measured by considering the total number of users or subscribers who buy its product throughout the period. The higher the number of sales, the better it is. It also implies that even a low ASP can help you yield a good profit margin when selling your products or services in bulk. 
• Segmented pricing: You must keep the average selling price of your product by developing pricing strategies tailored to different customer segments and needs. 
• Value proposition: You must be able to justify the price of your product by clearly communicating the value or utility of products or services. 
• Continuous analysis: Identify the latest industry trends, opportunities, and areas for improvement in your product by regularly analysing the sales data. 

Choosing the Right Pricing Strategy for Your Business

The term ASP is commonly used for businesses that generate a moderate to high sales volume in areas such as technology, food services, retail, etc. 

Remember, the average selling price is one of the most important indicators of the business’s market position, sales rep, and how much it has been commoditised. Your sales and marketing team must be competent and know how to reap the benefits from calculating average selling price because it is evident to customers in contrast to other revenue-related metrics. 

Now, the question is how to build a potent pricing strategy for your business. Let’s know about this in detail:

1. Extensive market or competitor research: One of the best ways to determine the price of your product is to do market research and see what your competitors are charging for the same product or service. It is also important to find out how much your target audiences are willing to pay for similar products or services you are offering.
2. Understand your USP: Identify your unique selling proposition. This will help you determine the justified price of your products. Knowing your USPs also allows you to assist with your long-term pricing strategy by uncovering how your value proposition is perceived in the market and potentially will evolve.
3. Review your customer base: An important consideration to design your pricing strategy is how your current or potential customers have responded to the pricing so far. Another thing to note is how much they are willing to pay for your products or services.
4. Gather feedback: Customer feedback is invaluable when it comes to improving the quality or utility of your product. You must conduct surveys and ask questions to gain qualitative and quantitative insights into your customers’ beliefs, opinions, and behaviours around your product functions and pricing.

Tips for Developing Effective Pricing Strategies

The following factors help you develop effective pricing strategies to attract more customers:

1. Bundle pricing

Bundle pricing is a strategy that a business implements to increase its sales. This strategy involves offering multiple products or services as a package deal at discounted prices.  

2. Economy pricing

This strategy involves targeting customers with low budgets and those who want to save money on whatever goods or services they purchase. 

3. Premium pricing

This strategy targets high-income individuals and focuses on creating high-quality goods by developing a luxury branding strategy. 

4. Dynamic pricing

Recently, many companies have started adopting a dynamic pricing strategy that allows them to change the price of their services or products based on market demand at any given moment. For example, Ola’s pricing surges during a national holiday.

5. Value-based pricing

This pricing is similar to premium pricing. Under the value-based pricing strategy, a company bases its pricing on how much the customer believes the product is worth. This strategy is ideal for merchants offering unique products rather than commodities.   

Excel Techniques for Selling Price Calculation

How about leveraging Excel to calculate the selling price of your products? Excel can be a valuable tool for businesses when it comes to calculating the selling price. Here are some of the ways of how to do it:

1. Simple formulas

With basic arithmetic operations in Excel, you can create custom formulas and set them up to calculate the selling price based on overhead costs, COGS, and desired profit margin.    

2. What-If analysis

The What-If Analysis tool enables you to project outcomes based on various input values. This facilitates assessing how changes in cost or profit margins may impact the selling price and business profitability. 

3. Data visualisation

Excel also offers graphing and charting options, which allow you to view pricing data, track customer trends, and analyse the value of different products.  

4. Trend and demand analysis

Using Excel, you can organise historical sales data. This helps you analyse historical trends and patterns in-depth to elevate data-driven pricing decisions.

5. Time efficiency

Calculating the selling price manually can be daunting. However, using Excel’s automatic calculations can save time and effort. You only need to apply the formula initially; once it’s done, it can be applied to multiple products or services.   

Integrating Manufacturing Software for Effective Selling Price Strategy

Staying updated with technology is important to stay ahead of your competitors. Manual audits will slow down your business process and are prone to human errors. 

Therefore, the best way to conduct audits and calculate selling prices is to opt for a cloud-based manufacturing system that offers real-time monitoring and automatic cost-price calculations. 

Automating the process can help you gain better insights into calculating costs, which can help you make more informed pricing decisions. 

Conclusion

These tricks and tips can help you build a robust pricing strategy and determine the best selling price for your products or services. 

Remember, an average selling price is more than just a financial metric. It’s an indicator that demonstrates how well the company is performing in the market and its pricing strategy. Thus, you should focus on optimising the pricing by analysing customer data to understand what price points are most likely to result in a sale. 

We hope by now you have figured out how exactly you should calculate the selling price of your product. 

Once you have gained control over your pricing strategy, the next step is to increase your sales by selling your products worldwide. If you want to expand your audience reach and enter the global market, it is essential to prioritise reliability when choosing a shipping carrier.

By selecting a carrier like Shiprocket, you can ensure your freight arrives on time, meet customer expectations, and maintain your reputation. Besides, this cross-border shipping provider also makes the customs clearance process seamless and automates the workflow for efficient order processing.