Definitions and explanations of the long list of jargon and notions used in pricing. Which price ? which cost? what is that analysis? Here we explain basics on pricing terminology.
It is important to know what price you are talking about as a data point – misunderstanding this might totally drive your analysis out of path and lead you to incorrect results.
I list below the items that come up often when we discuss pricing analysis.
Revenue / Price side:
List price / Public Price: This is usually what you expect an end-user to pay. For example, imagine you went to a locksmith to buy a new set of cylinder for your door, and asked for the price. The locksmith pulled a price book and pointed a product and it’s price from a list. This is the list price.
Net price: The expected price that a customer is supposed to pay after discounts (but not rebates). For example, if a customer is associated to a price list X, the SKU xyz on that list has the list price of 100 EUR and the customer has 50% discount over that price list, the net price of the SKU for this customer is 50 EUR.
Selling price: Now we are talking of a transactional price. This is the price that was realized in an actual sales transaction. You can refer to the this as “the selling price of SKU xyz on the invoice no 123 was 15 EUR” for example.
Net promotional price: When we set the selling price of an item to a value that is detached from the list price, and that applies same to all customers, this would be called a promotional price. For example, regardless of their sizes and discounts if all a product is offered to any customer at 10 EUR for a limited amount of time, this would be a net promotiona price.
Average selling price (ASP): This is used very widely when running pricing analyses. When you aggragate sales at a level (region, customer, sales channel etc.) and divide it by the total quantity, you end up with this figure. For example a statement like “this product sells for 20 EUR in Germany, but for 25 CHF in Switzerland” usually refers to average selling price.
On and off-invoice discounts / charges: If a discount is applied at a invoice line level or at the bottom of an invoice as an additional item, this is an on-invoice discount. If these discounts or charges are sent/received on another document, this would be an off-invoice discount/charge. We will explain this further at each item below.
Standard discount: In a general pricing procedure, you have price list(s), customers linked to these lists, and the standard discount that a customer has over that price list. This way, when a customer places an order, you know what price you should be expecting from a customer. If you read the “3-way-match” process in accounting, you understand that the price on the purchase order should match the price on the invoce. The standard discount (less list price) gives the customer care person the price they expect to see on a purchase order. If not, customer care usually rejects the purchase order and asks the customer to correct the order so that the invoice s/he generates matches the PO. Standard discount is an on-invoice discount, applied at line level.
Surcharge: If a seller is applying an overall increase to the sales to a customer for a period (usually for a predefined condition), this would be called a surcharge. An example can be fuel surcharge that carriers send at the end of the month to offset their cost increase due to increasing fuel prices. A surcharge can be implemented at on-invoice level (a provision of surcharge at each invoice), or off-invoice on a separate document periodically.
Rebates / Bonuses: When a customer signs the annual distribution agreement, usually they have sales targets and paybacks related to these targets. For example, a standard discount of a customer might be 50%, but you can add this clause to the agreement that any sales above their target purcahse of EUR 100K will be discounted at 55%, or they will receive a payback of EUR 2K per EUR10K they sell over their target. These payback schemes, called rebates or bonuses, are usually paid at the end of the year, and they are off-invoice discounts.
I tried to cover the basics. If you hear any other term very often during your pricing work please note it down in the comments and I would be happy to extend the list.