What is net cost? (With definition, formula and tips)
By Indeed Editorial Team
Published 8 July 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.
Calculating the net price of goods is a basic skill to develop for a successful career in sales or business development. The net price is a standard component of gross cost, which reflects the amount that customers pay for products or services. Knowing how to affect and modify the net price can help you improve sales revenue and attract new customers. In this article, we explain the definition of net cost, show you how it relates to gross cost and teach you to calculate the net price using a simple formula.
What is net cost?
Net cost, or net price, is the amount that equals the original price, or gross cost, minus all applicable deductions and production costs. For example, if you decide to purchase a machine for a company, the net price of that machine equals its gross cost, minus the margin on the goods that you produce with that machine. To better understand the concept of net price, it's vital to learn the definition of gross cost.
Gross cost, also known as gross price, is the entire acquisition cost of something. In other words, it's the entire amount that someone pays for a product or service. Gross cost can include the following:
cost of transportation
equipment assembly cost
cost of raw materials
cost of power
cost to train employees on how to use the machine
What's the relationship between net cost and gross cost?
Understanding how net price relates to the gross cost of products can show you how cost-efficient a production process is:
When the net price equals the gross cost, there are no gains or losses. This means that purchasing a certain product gave you the same amount of benefits that you spent on it.
When net price is less than gross cost, the benefits don't offset the gross cost. This is what usually happens when you buy something at its full price.
When the benefits exceed the amount you paid for a product, it's when the net price is a gain. This can happen when you purchase something after a seller decides to heavily discount it just to sell it before they start selling something else.
How to calculate net price of a product as a buyer
Learning to calculate the net price of goods is helpful when you want to determine how much a particular seller makes in revenue through selling products or services. Here's how you can calculate the net price of a product in three simple steps:
1. Determine the gross price of a product
The first step to calculating the net price of a product is determining its gross price. This is especially important when you're a buyer as spending a bit more time analysing the gross price of a specific product can help you save some money. For example, it's likely that the same product costs less when you buy it from a bigger retailer.
2. Identify all financial benefits
The next step requires that you identify all financial benefits for a company that sells the product you're interested in. One of the most important things that companies add to their net prices is the sales tax. As of January 2022, the standard sales tax rate for most goods and services is 20%. On top of this amount, it's also necessary to determine specific costs of production, transportation and marketing.
3. Use a formula to calculate the net price
Once you determine the gross cost and financial benefits, you can easily calculate the net price. Consider using the following formula:
Net price = gross cost - financial benefits
For instance, if you pay £200 for a new oven and the oven's deductions equal £90, you can determine that the net price is:
Net price = £200 - £90 = £110
How to calculate your net price per sale as a seller
It's also helpful to know how to calculate the net price if you decide to become a self-employed entrepreneur or work for a new start-up. The goal of this is to make sure the companu makes a profit from its sales. Here are the steps to calculating the net price per sale:
1. Calculate the total cost
Calculating the total cost of production is a basic business skill that allows you to determine the net price per sale. The first step to identifying the net price requires you to calculate the total cost necessary to produce a product or service. For example, this can include raw materials, labour, salaries and employee benefits or fixed and variable overhead costs, including marketing or website maintenance.
2. Calculate your total sales
Next, you can calculate the total sales. The total sales involve the number of units the company manages to sell during a certain period of time, for example, within a month. For example, if the company charges £15 for a phone case and sells 2,000 cases, the total sales are:
Total sales = £15 x 2,000 = £30,000
3. Divide total cost by total sales
Lastly, you can use this simple formula to determine the final net price per sale:
Net price per sale = total cost / total sales
This allows you to determine if the current prices can help the company reach profitability. If not, you may consider adjusting the prices to better match the production costs. Depending on the brand's reputation on the market, you may consider increasing the prices to make more in sales. This is because customers usually prefer buying from brands that they know well. If the company is new on the market, choosing lower prices for products can help attract new customers and increase brand awareness.
Tips for improving net price estimations as a seller
Improving the net price is an important business goal for many businesses. If you're responsible for determining the net price of certain products or services, here's how you can approach it to improve the net price estimates:
Conduct market research
Through conducting market research, you can determine the average price for products or services similar to the ones that the company you work for wants to sell. During this step, it's important that you focus on finding cheaper goods with the same or similar quality. You can then analyse the companies that sell them and determine what helped them improve the net price of their products.
Reduce overhead costs
Another strategy for improving net prices involves reducing overhead expenses. Overhead expenses are all costs related to marketing products, including promotional materials, attending trade shows and paid advertisements. Reducing these costs is usually possible through identifying a narrow target market for a product. Once you know the ideal buyer, you can analyse their behaviour and preferences to determine the most effective communication channels to reach them.
Automating processes can help improve the net price because it allows for a reduction in manual labour. In some cases, it requires making bigger upfront investments, for example, when deciding to purchase more equipment. Other times, this can be possible by eliminating certain processes from the initial sales funnel.
Sometimes raising the prices of particular products can be an effective strategy for improving a business's profitability. For instance, this can happen when it's difficult to find cheaper raw materials or when it's impossible to automate certain production processes. Raising prices may discourage some customers, which is why it's necessary to introduce some added value to the products, such as through marketing them as high-end rather than everyday products.
Example of calculating the net price
Here's an example of calculating net price:
John recently purchased a new TV for his team and paid £1,000 for it. This amount is the gross cost of acquiring a new TV, but it's not how much the actual product is worth. To calculate the net price of that TV, it's necessary that he deducts other things added to the net price of the product, including:
20% sales tax: £167
transportation costs: £30
cost of manual labour: £20
This means that the total costs that John can deduct from the gross price to determine the net price equal £317. This means that the net price of the TV is: £1,000 - £317 = £683.
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