What is the Selling Price?

The selling price of a good or service is the price paid by the buyer. While the seller determines the price, several factors influence how the seller gets to that specific number. The price for the same product or service may vary across buyers based on the seller’s discretion.

The ability to alter the selling price can play an essential role in determining how profitable a business is. This article will explain how to calculate selling price and the factors that decide the selling price and the ways you can reduce operating and production costs to help increase your profit margin and offer more competitive prices.

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What Determines the Selling Price?

Businesses have to look at several things before determining the selling price. The industry in which a business operates in plays a vital role as you need to know the competitive market price for your product or service.

For example, if your business is in a highly competitive space, having a high selling price might encourage potential new customers towards competitors who might be getting the same service for a cheaper cost. Of course, it's not entirely this straightforward which is why finance teams and small business owners look at a range of things to finalise on selling price including:

• The cost of production: This is the most fundamental factor that can determine the ultimate selling price. This is the benchmark for companies to refer to and add a profit margin that would make the selling price appropriate
• The target profit margin for the business: A business with high operating costs and interest expenses would need to mark up the price at a higher percentage over the cost price compared to a business with lower expenses
• The nature of the product offered: In the case of essential product like food, beverages and basic needs for households, a business can pass on higher costs to the customer by increasing the selling price. However, if the product or service that are non-essential, the ability to influence the selling price by the seller may be restricted

Additionally, other considerations go into affecting the selling price. For example, a customer purchasing a house when there's high demand for real estate may have to dish out a comparatively higher amount. These conditions can influence the selling price and overall bottom line of an organization in a unique way which is why companies look at the average selling price of similar products in the market at a certain period. We'll discuss average selling price further in the next section.

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Average selling price vs. selling price

Selling price is how much a business sells its products and services to customers while average selling price is based on supply and demand and is calculated to assess the prices of similar products in the market at a specific period.

For example, when a product is in demand for a certain period, the prices of similar products in the market go up so companies can look at this data to determine how much margin they can put on top of the production or purchase cost.

To calculate the average selling price, we add the prices of similar products then divide it by the number of products in the equation. For example:

Consider 3 cars of the same brand, model and condition with current prices of:

Store A: Sells for 15,000
Store B: Sells for 13,000
Store C: Sells for 14,000

We add these up and divide by 3 so we get = 14,000 which is the average price at a given period.

Selling price formula

In most cases, the production cost serves as a guide to determine the final selling price of a product or service. The business then decides on an additional margin above the cost of production. However, it's important to keep in mind the other costs such as operating and financial expenses which are not included when calculating the production cost. It also determines the final profit realized by the business.

To better understand the stages of different cost and expenses businesses incur, check out our article about the 4 types for profit margin

A business has limitations in setting the additional margin depending on how much control it has over the pricing. When the business perceives that the product offered does not have a substitute, it can set up a high margin assuming that the product will always be in demand, giving rise to higher returns. When there are several alternatives to the product that is offered, the margin can be slim.

How to calculate the selling price

Selling price can be calculated using the following formula:

Selling Price = Cost Price + Additional Margin

1. Determine the total cost of producing a product
2. Build the margin above the total cost of production
3. Based on the margin, decide the amount that needs to added to the total cost of production while having other costs such as operating and financing costs in mind
4. Sum the total cost of production and margin

How to calculate selling price per unit

One can determine the selling price per unit by simply using the formula below. Alternatively, the cost price per unit can be used, and the margin can be added to arrive at the selling price per unit.

Selling Price per Unit = Cost Price per Unit + Additional Margin

💡Cost Price per Unit refers to the cost that is involved in making a product or service ready for being sold. This determines how much each unit of a product costs to the business. These costs include Variable and Fixed costs.

Depending on the nature of the product or service, the approach to calculate the selling price per unit can vary. The following section will better explain several complexities in calculating the selling price across different companies.

Selling price Sample calculation

• An Automobile business: Suppose the business determines the total cost to manufacture a car is GBP 2,000. The costs would include raw materials, wages, and other production costs. Since this would not cover other operating expenses like selling and marketing costs, depreciation of machinery, and interest payments, the business decide to add 100% of margin over the production costs.

Selling Price = Cost Price + Additional Margin

The selling price per unit would be:

Selling Price per Unit = GBP 2,000 + (100% of GBP 2,000) = GBP 4,000

The initial reaction would be that the markup is too high. However, this translates to a gross margin of (4000 – 2000)/4000 or 50%, which may seem reasonable for a business with high operating and financial costs.

Are there ways to reduce the cost and have a more competitive selling price?

• Use a multi-currency account to manage payments in different currencies
  If you source your raw materials from cheaper suppliers overseas or receive payments from clients in different currencies, you'd need Wise for Business to reduce the transfer as well as foreign exchange costs. You can also use a Wise multi-currency account to withdraw some funds that are in different currencies from e-commerce platforms or payment provider like PayPal. In turn, you can use those savings to reduce your selling price, making your product more competitive. See how to transfer money from PayPal to Wise

• Review contract with existing partner and negotiate for discount
  If you have a large input cost contract with a vendor, you may be able to negotiate a discount for buying in bulk, or for repeat business. Success in negotiating could reduce your cost and allow you to lower your selling price.

• Outsourcing production and services
  As your business grows, you may be able to outsource some of your production or services that can be easily replicated by cheaper labour or cheaper manufacturing from a business that works at a larger scale abroad.

• Automated business processes
  If you have repetitive processes, some may be able to be automated. This should save time, increase productivity, and allow you to lower your selling price over the long run.

• Sourcing materials from cheaper suppliers abroad
  You may be able to source cheaper materials from suppliers in different countries, taking advantage of cheaper labour costs. Overseas suppliers like Alibaba offers a wide range of ready made products that are offered at cheaper prices so resellers can add a profit margin on top.

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Reduce international payment costs and maximise profitability with Wise

💡 In trying to realize cost reductions, you'd be surprised how much your business spend on charges like SWIFT fees when making payments to overseas suppliers and contractors or collecting payments from customers or e-commerce platforms. These fees can reduce profitability by a few basis points when they add up. This is why a Wise Mult-currency account can come in handy when managing payments in different currrencies. Wise offers foreign exchange services at the mid-market rate for a small fee that is up to 19x cheaper than PayPal. With Wise's bank beating fees, exchange rates and transfer speed, you can collect and pay invoices on time and without the hefty fees. The additional cost-saving through Wise can differentiate a business from its peers in terms of pricing and provides an opportunity to pass on the cost savings to customers, or to realize a higher margin.

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