Net Price - Definition, Importance & Example
What is Net Price?
Net Price is the price at which a product is actually sold. Net Price is the value of a product after all costs and taxes have been added and discounts subtracted. A product has a list price. At the point of sale, certain taxes are applied on the list price and certain discounts are made. After adding and subtracting them respectively, the net price or the real selling price is obtained.
Net Price is the actual price which a customer pays after reducing discounts from list price. Usually on a sale’s tag, the listed price or MSRP (Manufacturer’s Suggested Retail Price) is attached along with the discount on the product. This is known as the sticker price. When other such charges including taxes, shipment, installation and additional discounts are added to the sticker price, it becomes the net price. On the other hand, maximum retail price (MRP) is the maximum amount a customer can be charged.
Importance of Net Price
Net price is important from the marketing point of view. It is the price that the customer actually pays for the product. And this is the price that actually generates the revenue. In a competitive market, there is essentially a price competition or the price war.
This price is actually the net price and not the gross price. Even if the gross price of a company is higher and has major incentives in the form of lower taxes and higher discounts and the net price is lower than other players, he is likely to capture the market. Revenue is generated out of the net price. And because net price depends on several external factors, accurate forecasting becomes all the more difficult. There could be an increase in tax rates or seasonal discounts may be offered. All such contingencies actually affect the revenue for the firm.
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Difference Between Net Price, List Price and Gross Price
List Price: The price tag which is attached with the product shows the listed or marked price. This covers the operating expenses, cost of goods sold and the profit margin.
Gross Price: Gross Price is the list price plus the additional charges in the form of taxes, royalty and service charges.
Formula of Net Price
Net Price is the gross price less the monetary benefits that the customer derives while buying the product.
Net Price= List Price + Additional Charges - Discounts = Gross Price - Discounts
Example of Net Price
Suppose the List Price of a shirt is $100
The tax rate is a 10% on the listed price
The discount offered is 20%
Gross Price of the shirt= 100 + 10% of 100 = $110
Net Price of the shirt = 110 - 20% of 110 = $88
This is the amount that the customer has to actually pay to buy the shirt.
Hence, this concludes the definition of Net Price along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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