List Price vs. Net Price: Definitions and Differences
By Indeed Editorial Team
Published June 25, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Companies consider costs associated with materials, labour, development, and expected revenue to determine the price of their products. Prior to determining a final price for a particular product, businesses also consider factors such as the uniqueness of products, their relevance in the market, and competitors' prices. Knowing about the list price and net price of products can help you learn how businesses decide how much to charge for them. In this article, we explore list price vs. net price, including their definitions and examples you can reference when learning how to calculate them.
List price vs. net price
Before highlighting list price vs. net price, it's vital that you learn their respective definitions and use. The list price, also known as the manufacturer's suggested retail price (MSRP), is the price that the manufacturer suggests for the store or the outlet to charge for a product. This is the price that companies offer to buyers without any discount. Net price, or negotiated price, is the actual price a buyer pays for a product after the deduction of discounts.
What is list price?
List price is the maximum amount companies or manufacturers sell their products to customers. As an example, in the supermarket, you can find the list price on the price tag of the product. MSRP letters are not always visible on these items, but you can find the price written on the packaging or on stickers attached to them. List price is based on two primary factors:
The costs involved in developing a specific product or service.
The average price for the equivalent product or service in the current market.
When companies price their products, they aim at keeping the price close to the list price, so they can increase their profitability from the sales. This is only effective when the company has no competitors in the market or the demand for the product is very high for the customers to expect discounts or bargains. Many luxury brands have adopted similar pricing policies and incorporated them into their marketing strategies.
What is net price?
The net price is what a customer pays for a product or service after discounts or promotions. For example, when consumers buy items from a grocery store, they don't always pay the exact price listed on the product. Stores might offer various discounts and coupon codes, which result in a reduction of the product's price, also known as the net price.
Pricing a product closer to the list price may make companies more money, but market conditions continue to change, giving consumers more choices every day. In the modern market, there are many competitors offering additional discounts on bulk orders or early bird discounts for newly released products. The alignment of a company's net price and the list price is essential to ensure effective pricing. To set a competitive net price, companies follow the following principles:
Making a list of all costs including overheads
Considering the profit they need from the sale of their product
Subtracting discounts such as wholesale, gift vouchers, or reward points
Adding additional charges such as transportation, legal, or installation fees
Benefits of using list price
The list price or the MSRP is the standard pricing guide in the retail and manufacturing industry. Here are some benefits of using a list price:
Helps standardize costs for consumers: By providing MSRPs with their products, manufacturers standardize costs for consumers, which enables them to budget and compare prices when shopping at different stores.
Guides new business owners: This price serves as a useful guide to determine a company's starting costs, which they can adjust based on their knowledge of operating costs and profit margins.
Educates customers: List price helps consumers estimate what they're likely to pay, and informs consumers about the reasonable price for goods.
Serves as a starting point for negotiations: Retailers and customers can use the list price of a product as a starting point for their negotiations to find a price that is acceptable to both parties.
Benefits of using net price
Companies can provide additional discounts on the list price to attract more customers and increase their sales. Some benefits of using a net price include:
Improves brand awareness: Brand awareness refers to the extent to which customers know about a company's products. For instance, providing discounts on products can be an effective way for businesses to gain more customers and enhance their brand awareness by offering quality products and services.
Builds customer loyalty: Customer loyalty is important for companies because loyal customers buy products or use services from them for the value and experience they offer. This makes it possible for a company to retain its customers, even if its competitors provide similar products at a lower price.
Acquires new customers: One of the primary goals of a company is to acquire new customers. Companies can encourage new customers to try out products by offering trade discounts, gift vouchers, and loyalty points.
Increases sales: By offering discounts on the pricing, a company can increase profits and sales by attracting more customers. Businesses can use this approach to increase sales when launching new products and aiming to engage more consumers.
Creates exclusivity: Customized and unique discount codes can help companies retain loyal customers and create a sense of exclusivity. Exclusive discounts create a more personalized experience for customers.
Factors that influence pricing
Several subjective and objective factors influence a product's pricing:
The objective factors that often influence pricing are:
Expected revenue from sales
The subjective factors that influence pricing are:
Value a unique product provides to the customer
Competitors' pricing strategies
Long-term relevance of a particular product in the market
Government and legal regulations
Demand and supply
Market position of a company
Social and ethical factors
Example for calculating the list price
Here is an example of how to calculate the list price of a product:
During a weekend sale, the cost of a computer at ABC Electronics after a flat discount of 10% is $10,000. A customer wants to determine the list price of the computer, so they convert 10% into its decimal form, 0.1, and use the following calculation:
List price = Net price / (1 - Discount)
List price = $10,000 / (1 - 0.1) = $11,111
The list price of the computer on a normal weekday is approximately $11,111 dollars.
Example for calculating the net price
Here is an example of how to calculate the net price of a product:
The list price of a computer at ABC Electronics is $10,000. During a weekend sale, the store offers a flat discount of 10%. The sales tax on goods and services is 5%. The store charges additional fees of $15 for recycling. Before buying the computer, a customer wants to determine the net price or the final price to pay to the store, and have the following information:
List price: $10,000
Discount: 10% = 10/100 x $10,000 = $1,000
Price after discount = $10,000 - $1,000 = $9,000
Sales tax: 5% = 5/100 x $9,000 = $450
Net price = List price - Discounts + Sales tax + Fees
Net price = $10,000 - $1,000 + $450 + $15 = $9,465
The final or net price that the customer pays is $9,465 dollars.
Other differences between list price and net price
The other differences between list price and net price are:
Companies determine the list price by comparing the prices of similar goods and services in the market and their manufacturing costs. The list price covers all operating and production costs and includes a profit margin that makes the business profitable. For example, if a product costs $100 to manufacture, a company may set the list price at $150, enabling a profit margin of $50 per unit. It's also necessary for companies to allow a margin for discounts.
Companies calculate the net price by considering the prices of similar products or services in the market, along with competitors' pricing and market conditions. If a product costs $100 to manufacture, the company may set the list price at $150 and offer a discount of 10%, which sets the net price at $135. The trade discount demanded by a wholesaler is higher than what it's for a retailer or for a buyer. Large businesses usually offer larger trade discounts, anticipating that sales volume can exceed the discounts offered.
A business' list price usually represents the highest price it can charge for its products or services. Consumer demand determines the margin a company can add to its prices to make a profit. Market stagnation can cause business owners to reduce their profit margin or risk low sales. Final buyers largely influenced the prices of products.
It's the seller's responsibility to determine how much profit remains after all costs. If companies offer a discount such that the total revenue equals the total cost, they cannot profit. Companies set the net price of a product with a profit margin that allows a company to generate profit despite market volatility or stagnation.
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