Most small businesses use pricing structures to distinguish their products and services from that of their competitors and to test what price the market will bear. In many instances, buyers want the best deal possible, although, with luxury items, buyers are more willing to pay a higher price because they perceive the value to be higher. Businesses often set two types of prices: list price and net price. Though the differences between them are subtle, they can make a huge difference in sales, branding, and profitability.

List Price Elements

Business owners calculate list price by taking into account the prices that similar products and services sell for in the industry, and the costs to make a product or to create a service. List price covers all operating and production costs, but also includes a profit margin that makes the whole enterprise worthwhile. When calculating the profit level, business owners must remember that they will have to offer trade discounts to buyers that will eat into that profit margin.

Net Price Elements

The net price is also known as the final selling price, and is calculated by subtracting a trade discount from the list price. For example, if the list price of a vehicle is $19,000, a car dealer may offer a special incentive of 5 percent that would result in a net price of $18,050. The thing to remember is that not all trade discounts are the same. For example, a wholesaler will demand a higher trade discount than a retailer or than a buyer. Typically, businesses that sell in volume will offer larger trade discounts, correctly believing that the volume of anticipated sales will more than make up for the discounts offered.

Determining a Pricing Strategy

Typically, list prices are the highest price a business can charge for a product or service. Business owners must take into account consumer demand before they determine how much of a profit margin they can build into their list price. If the market is tepid, business owners must reduce their profit margin or risk low sales. As a result, the final buyers are the biggest factor in determining the list price for a product or service.

When it comes to net price, the onus is on the seller, rather than the buyer. The seller must determine the price at which a profit is still possible. As a result, the discounts and promotions that a seller offers are dictated by the break-even point. Sellers never want to simply break even, so their fees will always be aligned with the amount necessary to generate a profit, even if that profit is less than desired.