Once again, we talk about the best pricing strategy for your shop, whether you are a manufacturer or a retailer. How to choose one? What we know for sure is that you need to investigate your clients, competitors, and the market itself to be able to set up a favorable pricing strategy for your business.
In this article, we will thoroughly examine the net price, so you can get a grasp of this price and take it into account when forming or adjusting a pricing strategy for your business. You need to understand the importance of it to optimize your pricing strategy. Very often the List Price is discussed along with the net price. In this article, we will compare these two for your consideration.
The Net Price of a product is the final price that buyer is paying after all possible deductions in terms of product discounts and promotions. It represents the final price for the seller, as well, after all added fees and costs and all deducted discounts given to the buyer.
Another definition of the net price is that it is the final price after all the discounts are subtracted from the List Price. Generally, not very many products and services are sold at the List Price. A more common case is to sell at the Net Price, after taking into consideration all reductions for wholesalers, deals, and promotions. The formula for the Net Price would be List Price + Additional Costs – Discounts. Here, we introduce the term List Price.
When discussing the List Price, we have to start from the MSRP which is the manufacturer’s suggested retail price that doesn’t have to be respected by sellers. Anyhow, MSRP is the highest possible price that buyers could pay for a product or service because this price already includes all the selling costs (production costs, distribution costs, retailers markups, etc.), which supposedly guarantees that each of the parties will earn profit.
The difference between the List Price and the Net Price could be sales and other discounts, rebates, and any amounts negotiated between the seller and the buyer. When all these amounts are subtracted from the List Price, we get the Net Price. As the List Price is the initial price, you should use it as a reference to analyze additional selling costs you might face and determine the expected profit margin.
As we all are buyers, we can analyze these two types of prices from a buyer’s perspective. Firstly, let’s agree that the price matters as most buyers’ decisions come down to price.
While we make analyses and price comparisons before any purchase, especially a major one, we look for better terms and deals. This simple general fact indicates that sellers should compete based on the discounts they are able to offer especially when it comes to acquiring new clients. The Net Price generates revenue because the possibility to offer discounts and lower prices increases sales volume. Another benefit is the ability to gather loyal customers by offering loyalty programs and special discounts for long-term clients. Those kinds of gestures engage them with your brand and reinforce trust.
On the other hand, we are all aware that price and value somewhat influence each other, especially in the eyes of customers. Therefore, we consider luxury products, whether cars or make-up and women’s shoes as better quality because of the extremely high prices. Certainly, if your ultimate goal is higher profits, you should stick to the List Price. This concept succeeds in very few situations. In case you are the absolute leader in the market, let’s say, that you almost have no competition or when the demand for your product or service is extremely high. As mentioned already, luxury brands have the ability to sell at List Prices. As is generally known, it is impossible to find original Louis Vuitton pieces at a discounted price. The same thing applies to Chanel, Tesla, MAC Cosmetics, and several more high-end companies from specific niches.
What allows sellers to gain a competitive advantage is the ability to offer discounts and give special promotions to their customers. This is the crucial difference between the List and the Net Price. If you decide, as a seller, to form your business’ pricing strategy based on the Net Price, you will have better chances to lead the market. It is a business’ choice to decide to what extent to step away from the List Price. Whether to sell at the List Price, so it can secure higher profit margins, or to risk it and offer numerous discounts to existing clients and even better deals to acquire new clientele.
Having all the mentioned pros and cons in mind, it is crucial to conduct the competitors’ analysis and their both historical and current product prices. Once the initial analysis is performed, you set up your pricing strategy, and position yourself on the market, you have to keep monitoring the competition. No matter what industry you belong to, eCommerce is a fast-paced place and it is difficult to acknowledge all the innovations and changes that happen daily.
No matter what prices your competitors utilize, it is significant to stay aware of price changes they make (some adjust prices several times a day) so you can match yours or simply adjust them according to your chosen pricing strategy. Aggravating circumstance if competitors favor net prices is the frequency of price changes and a variety of discount offers in terms of duration or percentage offered. It is hard to predict or expect your competitors’ discounts and special deals unless seasonal.
The variations between Net and List Prices of competitors’ products can be accurately monitored and captured with a price monitoring software solution. Even if you are the market leader who sets prices and makes initial adjustments, you need to monitor your competitors to capture their response to your action. More importantly, if you are a seller in a highly competitive industry who strives to find a way to the top, you have to always be aware of the price changes so you can be sure not to fall behind.
To sum up, theoretically, the List Price guarantees higher profit and this might seem an ideal choice for your business. On the other hand, have in mind that you risk being undercut by competitions that have lower prices. The Net Price is actually a competitive tool since the discounts are the only variable among competitors that can guarantee an advantage.
Based on your clients, competitors, and the nature of the market, you will form your pricing strategy. Once you do it, all of the work regarding price monitoring and price adjusting you can leave to the software to provide you with an overview of the market anytime and work for the success of your business nonstop.