How does pricing work?

Definition

Pricing is the set amount you charge a customer for a product or service. On the books, this is the number that becomes revenue when the sale is earned, not the leftover after cost and not the clay still on the shelf.

A pottery studio that lists a mug at $36 has set this figure at $36. The $12 of clay and glaze is cost of goods sold after the mug sells; the $36 is the listed price.

Cash-basis studios may record the sale when cash hits the till. Accrual books record revenue when the mug is delivered, even if the customer still owes the studio.

This figure is the tag or the quoted amount. It is not markup, and it is not a percentage of cost.

Where it shows up

P&L: Related to the revenue that follows each listed price.

Balance Sheet: Related to the receivables those prices create.

See also: Markup · Gross Margin · Revenue

When you look at your Income Statement, listed prices show up as revenue once the sale is earned. A weekend of $36 mugs is a stack of those tags, not a separate pricing account.

When prices are high relative to cost, each sale leaves more after clay and glaze. When they are low, the studio may be running a sale, or the mix may have shifted toward smaller pieces.

The Balance Sheet holds accounts receivable when a tagged sale is still unpaid. Unsold mugs sit in inventory at cost, not at the $36 tag.

On the Statement of Cash Flows, collecting the listed amount is the cash event. A price on a shelf does not move cash until someone pays.

How it works

The studio picks a number a customer will be asked to pay. That number can sit on a shelf tag, a website, or a written quote.

Cost is an input to that choice, not the price itself. Clay, glaze, kiln time, and a share of studio rent may inform the tag, but the tag is still the $36.

Stay with the listed amount when you read this figure. Markup is the add-on from cost; gross margin is the leftover as a share of this price.

A tray of mugs can share one tag, or each shape can have its own. Average order value then tells you what customers actually paid per ticket, which can differ from the mug tag if they buy more than one piece.

A discount later cuts what this price becomes as revenue. The listed $36 is still the starting tag; the ring may be $30.

After a mug sells, revenue takes the amount the customer agreed to pay. Cost of goods sold takes the clay and glaze; those are separate from the tag.

Keep the price list, the quote file, and the register recap together. Anyone asking why Saturday's sales were $1,800 should see how many pieces left and at which tags.

Do not treat cost as the price. The $12 of clay is what the mug cost to make; this figure is what you charged.

A deposit against a commissioned piece is not the full price either. The listed amount is still the price; the deposit is only a portion collected early.

Example

A pottery studio lists a mug at $36. Clay and glaze in that mug cost $12.

The price is $36. If 50 mugs sell on Saturday, revenue is $1,800 before any discounts.

If $200 of unsold mugs is still on the shelf, that $200 stays on the Balance Sheet at cost. The $36 tags are not assets.

The studio does not need a separate journal for the price list. Each sale records revenue at the tagged amount, and cost of goods sold records the $12.

If a class packs a set of four mugs for $120, the price for that set is $120. Average order value for that ticket is $120, not $36.

Common mix-ups

Pricing is not the same as markup. Markup is the amount added to cost; this figure is the tag itself.

Pricing is not gross margin. Gross margin is the leftover as a share of this price, not the price.

Pricing is not cost. Clay and glaze are what the mug cost to make; this figure is what you asked the customer to pay.

Related terms

• Markup: The amount added to cost to set a selling price.
• Gross Margin: Gross profit expressed as a percentage of revenue.
• Revenue: The total value of goods and services the business earned in a period.
• Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
• Average Order Value: Average revenue per customer order in a period.
• Quote: A priced proposal issued to a customer before an order is placed.
• Break-Even Point: The sales level at which total revenue exactly covers total costs.
• Cost Of Goods Sold: The direct cost of the products sold during the period.