What if we told you that the price you paid was not necessarily the same as the average selling price of the item? The average selling price may initially seem confusing if you are interested in pricing strategy.
Why would a business deliberately sell goods for the same (or different) prices only to average the selling prices afterward for reporting needs?
The quick response is that a lot may be learned about the health of a company from its average selling price.
A reliable gauge of a company’s financial health, investors and business leaders closely watch the average selling price. As a result, a product’s average selling price should be more significant in most circumstances. However, in other circumstances, a low average selling price might be a clever, short-term tactic to gain market share for start-ups or businesses making a comeback.
In this brief guide, you’ll learn more about the average selling price and how to determine it for your company. But first, let’s quickly review what the selling price is.
What is a Selling Price?
The amount a buyer pays for a good or service is known as the selling price. It may differ based on the price buyers are prepared to pay, the seller’s acceptance threshold, and how competitive the price is concerning those of other businesses in the market.
Market, list, and standard costs are additional terms for the selling price. Additionally, the criteria listed below assist businesses in determining the selling price of their goods:
- The cost a buyer is prepared to pay.
- The sum that a vendor is prepared to take.
- The market price is reasonable.
You might give one of these considerations more importance than the others, depending on the type of business you run and the service offerings you sell. You can use the average selling price as a summary of these elements to estimate the price you should charge for your product. Find, what is the customer acquisition cost and how to calculate it.
What is the Average selling price (ASP)?
The amount of money at which a product or service is sold is the average selling price (ASP). It is an average price, as the name would imply. For example, you may determine the average selling price (ASP) by taking the total revenue earned by mobile phone sales and dividing it by the total number of units sold if a company sells hundreds of thousands of cell phones yearly at different sales prices.
The term average selling price (ASP) refers to the price at which a specific class of goods or services is typically sold.
For instance, the average selling price of electronics is higher than that of books. In contrast, the product life cycle for electronics is often shorter than that for books. For example, consider the first-generation iPhone with “Harry Potter and the Deathly Hallows” by J.K. Rowling. Both goods were released in 2007.
The life cycles of the iPhone and the seventh Harry Potter book are dissimilar. With the introduction of the 2008 iPhone 3G, the product life cycle of the 2007 iPhone was drastically reduced. Although it might be regarded as a collector’s piece, years of new technology and software updates have rendered it almost unusable. But the novel has an endless lifespan. Its product life cycle is ongoing as long as people are reading.
Several methods use the average selling price (ASP) as a benchmark. For illustration, companies entering a new market may consider a product or service’s average selling price (ASP) to position themselves.
Companies frequently disclose ASP (Average selling price) during quarterly earnings calls. Analysts and investors will examine a company’s average selling price (ASP) trend and make inferences from it. The cost of a product will vary depending on the product’s kind and stage of development. For illustration, the average selling price (ASP) typically drops when a product becomes older and becomes obsolete.
The term “average order value,” frequently used in e-commerce, is another name for average selling price. In the hospitality industry, a similar metric called “average daily rate” displays the average room rate customers will spend for a single day of lodging.
Finding out the average selling price is crucial because it enables your business to develop a strong marketing plan when introducing new goods or services to the market.
Why is Average Selling Price Important?
Understanding your ASP can help B2B SaaS companies gauge the effectiveness of their sales force and choose the most effective demand generation plan to launch their goods.
The average price a new customer pays when subscribing to the service is known as the ASP for SaaS businesses. This subset of ARPA is frequently referred to as average revenue per new account.
B2B SaaS companies can use the ASP metric in various ways:
Create a market entry strategy
You need a plan for pricing your goods or services if you’re going for a new market. This process is made more accessible with the average selling price. Once you have determined the average selling price metric, your business can utilize it to distinguish itself as a merchant of luxury goods or affordable goods. According to the ASP, raising your value can make your products appear premium, but the increased cost may result in fewer sales. In contrast, if you set your price below the average selling price (ASP), your business may sell more goods but will have to make do with narrower profit margins.
Your company can spot market trends by using the average selling price. Let’s show this by using headphones. Imagine that a business like Bose sold 150,000 of a $300 pair of headphones last year. They debuted their newest pair this year for $250 and sold 250,000 of them. Although the corporation reduced the price of its goods, this price cut encouraged more customers to buy, which resulted in a rise of $17.5 million.
Finding this trend may hasten the decision on market pricing if a new or established company is getting ready to introduce a new product in this sector.
Do you keep a particular product or scrap it? Your business makes decisions using the average selling price.
It is not always strange if you raise your selling price due to ASP and see a decline in sales. Alternatively, paying attention is essential if lowering your pricing still results in a decline in sales. Even though there may be several variables at play, ASP will eventually assist you in determining if you need to develop a strategy for the product or eliminate it from your inventory.
Use GoPro as an example. Action cameras are essentially the focus of GoPro’s business.
The investment community will keep an eye on the ASP of a company when it is based mainly on one product. For example, a price decrease may indicate increased competition, diminished negotiating power with clients, or a decline in demand, all of which can indicate failure. On the other hand, if there is an increase in sales volume, a decrease in the average selling price is not necessarily bad. For example, it would be problematic if GoPro’s cameras’ ASP decreased without an increase in the number of units sold.
Now let’s talk about another example; the average price for the hospitality industry, which is the average daily rate. On the Las Vegas Strip, a daily fee of roughly $160 is typical. The ADR often increases in the high-demand peak travel months and declines in the offseason.
ADR is monitored by analysts in the casino gaming industry also. An unusual spike in ADR could be a sign of rising demand. Check out the guide about demand planning.
The Importance of ASP as a Financial Metric
You can recognize loyal customers by connecting ASPs to customer personalities. Targeted marketing using these variables can increase the net promoter score (NPS) and upsell to particular client categories.
You may determine which business groups or geographical areas your product or service is performing well in by breaking down the ASP of that product. This makes it easier to calculate how much you should spend on advertising in each location or business niche.
How to Calculate Average Selling Price
You’ll need two pieces of information to calculate the ASP (average selling price) for a product over a specific time period:
Number of Sales
The total number of subscribers added throughout the time period, as measured by the number of sales.
Total MMR (Monthly Recurring Revenue) Added
The total amount of MRR (monthly recurring revenue) from new sales was added throughout the given time period. From the MRR, the ARR (annual recurring revenue) can be generated.
When calculating the average selling price, the ASP of a product is determined by dividing the total average revenue from the sale of the good or service by the quantity sold.
By dividing the total annual recurring revenue from new customers in a specific period of time by the number of new customers they signed during that given period, SaaS companies can determine and calculate asp.
OR ASP = Sum (Product or Service Revenue) / Count (Products or Services Sold)
Assume a cloud storage provider charges somewhere between $16,000 and $30,000 for 12-month contracts, depending on the amount of service and feature choices. Take the total of all closed-won deals, in this case, $240,000, and divide it by the number of customers signed, say 10, to get the average price for clients signed in a given month.
The ASP for this business would be $24,000, or $240,000 divided by 10 consumers.
Sloovi is a top sales tracking software tool in the industry. This tool simplifies the procedure and eliminates the need for a spreadsheet to calculate your average selling price.
Example 1: Using ASP (Average Selling Prices) for Competitor Analysis
Marketers can find the average selling price for their competitors’ products in markets where transaction data is made available to the public and use this knowledge to guide their pricing strategy.
The real estate sector is a prime example. Real estate agents conduct a significant amount of house sales and disclose the sales prices of properties in the communities where they operate. So, for instance, a real estate agent trying to sell a house can find out how many other houses in the neighborhood have sold on average over the past three, six, or even a year.
Real estate agents can estimate what potential buyers might be prepared to make payment for a home in this situation by using the marketplace ASP to assist them in negotiating the best deal for their clients.
Example 2: Calculating Average Selling Price to Measure B2B Sales Performance
You work as a B2B SaaS company’s sales manager. You use the following packages to build a three-tier pricing plan for your subscription-based product offering:
- Basic Package – $500/month or $5,000/year
- Pro Package – $1,000/month or $10,000/year
- Enterprise Package – $2,000/month or $20,000/year
Since annual customers pay their entire subscription fee up front, we must amortize those sums when including them in our monthly recurring revenue. These constraints enable us to produce specific monthly sales data, such as the total number of sales and the total MRR added:
Now we’re ready to calculate ASP:
Average Selling Price = $25,165 / 29 = $868
According to the estimate, your sales rep adds an average of $868 in MRR for each new subscriber they close.
More about Average Selling Price
Although it is used in practically every industry, the word “ASP” tends to be used more for enterprises with moderate to high volume, such as retail, food services, and technology.
ASP can be a helpful indicator of the performance of a company’s sales rep, its market position, and how much the organization has been commoditized. Sales and marketing need to understand and take advantage of ASP because it is evident to customers in contrast to other revenue-related metrics. In addition, sales executives can use it to compare the performance of the various members of their team. ASP varies widely between businesses and segments (such as target users and geography).
Get ASP Metrics Using Sloovi
The average sales price is the quick metric finance teams should review and share with the rest of the company. However, it’s more common than not necessary to piece together data from a disorganized CRM setup to produce a coherent data collection.
You can separate your essential ASP metrics by industry, market, or any other criterion you require with the aid of Sloovi. In addition, you may study your average sales data in a matter of minutes, thanks to our automation for complex data analysis.
Request a personalized demo today to learn how Sloovi can transform your ASP metric into valuable business intelligence.