The average price that a good or service is sold for
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The average selling price (ASP) is a term that refers to the price that a good or service is sold for. As the name implies, it is an average price. If a company sells hundreds of thousands of cell phones each year at different prices, you calculate the ASP by taking the total revenue earned by cell phone sales and divide that amount by the total number of units sold.
The average selling price can be used as a benchmark in a few different ways. Companies entering a new market may look at the ASP of a good or service to position themselves when they bring their product to market.
Companies will often report their ASPs during quarterly earnings calls. Analysts and investors will look at the trend of a company’s average selling price and draw conclusions from it. The price of a product will depend on the type of product and where the product is in its product cycle. As a product ages and becomes obsolete, the average selling price often decreases.
Other names for average selling price include “average order value,” which is commonly seen in e-commerce. In the hospitality industry, a similar metric called “average daily rate” shows the average rate customers will pay for one day’s stay at their properties.
The average selling price (ASP) is a term that refers to the average price a good or service is sold for.
ASP is simply calculated by dividing the total revenue earned by the total number of units sold.
The average selling price can be used as a benchmark and analyzed by current businesses, new businesses, analysts, and investors.
Calculating the Average Selling Price
A luxury handbag maker saw a big year in 2020. They sold 10,000 units at $250 each, 13,000 units at $220 each, and 20,000 units at $180 each. Let’s calculate what their average selling price was.
First, let’s calculate the total amount of revenue the company earned.
10,000 * $250 = $2,500,000
13,000 * $220 = $2,860,000
20,000 * $180 = $3,600,000
The total amount of revenue earned by the company was $8,960,000. Next, we add up the number of units sold, which comes out to 43,000. The final step is to divide the total revenue by the number of units sold. The calculation results in an average selling price of $208.37.
Uses of the Average Selling Price
1. Entry strategy
Companies that are entering a new market can use the average selling price to create their strategy on how they want to position themselves. Imagine that a company is looking to begin manufacturing men’s sunglasses.
When they look at the market, they see that the ASP of sunglasses is $65. The business may decide to set their price at $100 to position themselves as a premium retailer. They may set the price at $50 to be a value retailer or come in with a price equal to that of the market. It depends on what the business thinks is the best and most profitable route.
Entering at a lower selling price may result in tight profit margins. Entering at a premium price may lead to higher margins, but lower sales numbers.
2. Trends and decision-making
For companies currently in the market with a specific product or service, they can use the average selling price to identify trends and make decisions. If a company specializes in financial services and sees the average selling price of a certain service dropping over time, it can be a sign that the market for that service is drying up. The demand is declining, and the company must exit the market.
A rising ASP isn’t always a positive thing, and a declining ASP isn’t always a negative thing. For example, a company initially sells video game consoles at $400 per unit and sells 100,000 units in the first year. That is $40,000,000 in revenue. The next year they drop their average selling price to $300 per unit.
A 25% drop may sound frightening, but with the fall in price, the company ended up selling 200,000 in the second year for $60,000,000 in revenue. Revenue increased by 50% even though the selling price decreased.
Lowering prices to achieve a larger volume of sales is a tradeoff that businesses are willing to make. It works in the other direction as well. A rising ASP will eventually reach a point where each increase in price drives down the volume of sales, eventually making it detrimental to raise prices any further.
For Investors and Analysts
1. Draw conclusions
The investment community will analyze the average selling price to try to make conclusions about a product or service, a business, or a market. Take GoPro as an example. GoPro’s business primarily revolves around one device – action cameras.
When a company is mainly built on one product, the investment community will monitor the average selling price of that product. A drop in price can point to rising competition, lower pricing power with their customers, or a decrease in demand, which can lead to failure.
As we mentioned above, a fall in the average selling price is not bad if it is accompanied by an uptick in sales volume. If GoPro’s ASP for its cameras dropped in price without units sold increasing, it would be concerning.
Let’s consider ASP for the hospitality industry now. The ASP equivalent in hospitality is the ADR (average daily rate). The average daily rate on the Las Vegas Strip is about $160. The ADR tends to rise during peak travel months when demand is high and decreases during the offseason.
Analysts in the casino gaming industry will track ADR to get a gauge on the casino/hospitality industry and the underlying economic factors. An abnormal rise in ADR could point to an increase in demand. If demand is increasing for rooms, it could infer that revenues would increase in the other business segments for the casinos.
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