What is Gross Price? - Definition & Formula

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After reading this lesson, you'll understand what aspects of a product go into its gross price. You'll also learn how you can calculate the gross price of a product.

Definition of Gross Price

When you go shopping and you look at buying a smart TV and you see the price listed on the shelf, did you know that you actually have to pay more before you can use it? When you go checkout, what else is added to the cost of your smart TV? Sales tax is usually added to store purchases, so now your total cost is the cost of the smart TV plus the sales tax. This is also called your gross price or gross cost, the total cost of acquiring a product.

Think of the gross price as including all the costs associated with purchasing an item. For example, say you're purchasing a pond to install in your backyard. Your gross price would include the cost of your pond mold, the cost to dig up the hole, the cost of the water to fill up the pond, the cost of any fish you add to the pond, and the cost of the maintenance products you need to keep the pond running, like a pump for water movement. All of these go into the gross price of your pond because you need all these things to finish your pond.

Gross Price vs. Net Price

There is also a thing called net price. It's a little bit different than gross price. Your net price is defined as your gross price minus any benefits you gain from the product. For your pond, for example, your net price is the gross price of your pond minus any profit margin you get from selling any of the babies you may get from your pond fish.

For your smart TV, your net price is the same as your gross price since you don't have any other monetary gains from owning this smart TV. You benefit by being able to watch TV and videos on it, but you don't get money for having this TV.

Calculating Gross Price

To calculate your gross price, you'll need to consider all the costs that go towards acquiring your product. Because each product has its own set of associated acquisition costs, there is no concrete formula to calculate this price.

For example, your smart TV's gross price included the sales price plus sales tax. Your pond, on the other hand, included the pond tub price, the hole digging price, the water price, the fish price, and the maintenance equipment price. Your pond has more components because it is more complicated to acquire than a TV that you can simply bring home and set up.

Gross price is especially important for businesses that need to know whether a particular purchase is worth it. For example, say a teddy bear business is trying to decide whether or not to purchase another stuffer machine. The gross price for this stuffer machine includes the price of the machine itself, the cost to ship the machine over, the cost to set up the machine, and the cost to train employees to use the machine. If this gross price is higher than expected, then the company may choose to skip this purchase.

But companies also need to look at net price. Say the teddy bear company's stuffing machine will bring in additional business that gives them a profit margin of $10,000. If the machine's gross price is $9,000, then the machine's net price is $9,000 - $10,000 = -$1,000. This means the company's benefit from purchasing this machine is greater than the cost of the machine. In this instance, this means that the purchase will be a good one.

Example: Finding the Gross Price

Let's look at an example.

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