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Net Price & List Price: What is the Difference?

By Priceva
on June 09, 2022
When you’re developing a pricing strategy, it’s important to calculate both list price and net price. The success of your sales and lead acquisition will depend on what you gravitate towards, or, to be more precise, on whether you can find a balance between the two. In this article, we will explain the difference between list price and net price, and which factors to consider when calculating them.

What is List Price?

This is the whole (maximum) sum that a customer will pay for an item before any discounts. Hence, a list price is the highest possible price for the end buyer. This price depends on two major factors:

  • The prime cost of producing an item or developing a service for your business;
  • The average price of that product’s or service’s analogs on the market.

For these reasons, the list price is also called Manufacturer’s Suggested Retail Price (MSRP). It not only helps a company cover production costs but also to generate profit.

Many businesses try to follow the list price when introducing a new item or entering the market because it’s intended to help them establish and maintain profitability.

However, sticking to list prices is the right strategy only if you sell one-of-a-kind items (which allows you to enjoy a monopoly on the market) or the value of your product/service is so great that customers don’t expect any discount. Average retailers rarely stick to this approach because competition is very high. Luxury brands, on the contrary, are known for offering the list price only.

Anyway, the market keeps growing in all industries and new options are introduced every day. Hence, no brand, even a well-known one, can keep ignoring competitors’ offers and customers’ behavior. Any strategy should be adapted properly, and net price plays an important role here.

What is Net Price?

Net price is the cost of a service or product after promotions and discounts. This is what attracts customers and drives sales. Discounts and promotions are widely used when introducing a new product or as a part of a seasonal marketing offer.

Why is net price important? The profit margin largely depends on a company’s price management. The difference between list price and net price defines whether the company is ready to be a serious competitor and make profit naturally, or it needs to apply more effort and build its reputation among business partners and customers.

Sticking to the list price seems to be the best scenario, but the truth is that the modern market is highly competitive, especially when it comes to eCommerce. Competitors can easily set a more appealing price and perform much better for customers. Sometimes, setting an optimal net price is the only option to increase sales.

However, it’s important to remember that discounts should not greatly affect your profit margin. A perfect pricing strategy is about achieving a balance between attracting customers and financial stability.

How to Calculate the Net Price

Here are the basic principles of calculating the most reasonable net price:

  • Calculate the cost and overhead of manufacturing the product (or developing the service).
  • Figure out the expected profit from your sales - the list price should help with that.
  • Subtract all discounts that you plan to use (wholesale, loyalty discounts, seasonal offers, etc.).
  • Consider all taxes and fees (legal, transportation, installation) that may influence the price.


Example of List Price vs. Net Price

Say you want to sell a smartphone and calculate a list price of $1,000. To motivate your customers to buy it, you decide to offer a 10% discount. That means that with a list price of $1,000, the net price will be $900 since you subtracted $100 as a discount. Depending on your end buyer, this net price can be different because you offer larger or smaller discounts. A wholesale dealer may want a bigger discount than a customer you sell to directly.


How to Approach Net and List Prices

The most optimal price depends on the level of competition in your market. If you have few rivals, you can prefer setting the list price instead of a discounted net price. But such markets are rare, so most likely, you will need to stick to the net price to stay competitive.

To find a well-balanced price, you should keep the following in mind:

  • Figure out cost-plus pricing. Consider the entire cost of the production and development, and set a desired profit to calculate the list price.
  • Research the market and your competitors. That will help you understand how serious the competition is, and craft a pricing strategy that doesn’t give other companies an opportunity to come with a better offer.
  • Build relationships with distributors. Proper communication allows you to negotiate fair net prices and get mutually beneficial discounts.
  • Learn about your customers. That will help you understand how much they are willing to pay and which price works better for you both.

Benefits of Offering Discounts on List Prices

Introducing discounts on the list price allows a company to boost sales volume, create loyalty among customers and engage more potential buyers. You can run seasonal promo campaigns, create a discount program for loyal clients, and offer post-sale discounts for future purchases.

Price fluctuations also help to sharpen your competitive edge. For example, when a key competitor starts sticking to a list price and offers it to more price-sensitive customers, you can reduce your prices to generate more demand for your product.

To implement this strategy, you need a top-notch price monitoring tool, ideally one that displays both current and historical prices. Priceva’s Price Tracker can help you analyze the cost of products and build a solid pricing strategy to outperform your competitors.

Final Thoughts

Price management mostly depends on the level of competitiveness, production costs, and demand for the product.

The list price shows the highest profit rate because it is based solely on your company’s interests, but the net price is a more efficient competitive tool when there are many analogs around, or your business has just entered the market. Buyers are often looking for reasonable prices, so discounts and promotions work well for attracting an audience.

From a technical standpoint, a lower price is the only thing you can offer to your customers when there are many analogs. All other variables, such as production cost and legal obligations (taxes, fees) cannot be customized to help you achieve the desired profit margin.

Hence, it is important to use the net price of a product properly and come up with discounts that will be appealing for customers while keeping your earnings high enough. When you enter a highly competitive market (and most of them are full of alternatives), other companies can simply undercut you by offering lower prices. At the same time, keeping your prices minimal means you don’t have space to experiment.

FAQ

How much is the net price?

Net price is the list price minus all the possible discounts and promotions. At the same time, it cannot equal the manufacturing cost, because a business needs to maintain the desired profit margin as well.

Is net price with or without VAT?

Net price shows the cost of your product after discounts but before VAT. The latter is reflected in the gross price.

Is list price the same as trade price?

Not exactly. Trade price is the sum paid by a store before it offers the item to buyers. However, if the manufacturer does not use any intermediaries (like marketplaces and offline stores), the trade price can equal the list price.

What is the formula for a list price?

The list price should consider all the manufacturing expenses (production, transportation, fees and taxes, and so on) plus the earnings you want in order to reach the desired profit margin. If you are a consumer and want to calculate the list price of a discounted product, use the following formula:

SP = LP - LP*(D/100)


Where SP equals the sale price of the item, LP equals the original price of the item, and D equals the discount percent of the item.



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