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List Price vs. Net Price

Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson you will learn the key differences between list and net price. You will also learn about trade discounts and why they are offered to buyers.

Pricing Decisions

You worked hard and your equipment manufacturing company is finally taking off. The sales and marketing departments want to produce your first company catalog. It will be printed for mailing and will also be posted as a page on the company website. Before you send your catalog to print, you must make key pricing decisions. At what price will you try to sell your products?

List Price

Manufacturers and wholesalers preparing a sales catalog usually give each item a list price, also called the catalog price. The list price is determined by several factors, including market research to see 'what the market will bear' and the cost of the product. The list price should cover all production and operating costs and provide an acceptable profit level for the company after allowing for anticipated trade discounts. In many, if not most cases, the company will not be able to sell its products at list price because buyers will often demand a discount for larger sales volumes.

Discounts

Trade Discounts

An item's intended selling price, or net price, equals list price minus a given percentage called a trade discount. The amount of trade discount usually depends on whether a buyer is a wholesaler, retailer or final consumer. The larger the volume of the purchase, the larger the discount given. This is sound economics and pricing strategy. A larger volume of production will spread fixed overhead costs over more and more sales units, thereby reducing the total cost of the product. Before setting the level of trade discounts, it is important to understand how much product costs will be affected by the increase in sales volume.

Additional Sales Discounts

Sales personnel may also be given the authority to add an additional sales discount, which is a smaller trade discount to convince the customer to buy if the customer is not yet committed. Sometimes an additional smaller discount makes the sale, but this tactic should be used sparingly. Other customers may demand the same discount, thereby reducing overall profitability.

Obsolete Inventory Discounts

Suppose market conditions have changed, and competition has become fiercer in your competitive space. Perhaps there has been an inadvertent buildup in inventory. In these and similar situations, it might become necessary to use obsolete inventory discounts to reduce the sales price in order to move the product. You do not want inventory to build up and tie up critical working capital. Adding another trade discount may be prudent to clear the inventory.

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