What is the Average Selling Price?
The Average Selling Price (ASP) is the approximate amount paid by a company’s customers to purchase a specific product.
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How to Calculate Average Selling Price (ASP)
The average selling price, or “ASP”, represents the average price paid by customers for past sales.
To calculate a company’s average selling price, the total product revenue generated is divided by the number of product units sold.
The utility of tracking the average selling price metric can be internal, such as setting prices appropriately based on an analysis of customer demand in the market and recent spending patterns.
In addition, the pricing data can be compared across close competitors to ensure no company is undercutting them and taking away market share by specifically targeting the more price-sensitive customer segments.
While ASP can be tracked for service-oriented companies, the metric is generally more applicable for industries that sell physical products.
- Consumer Retail
- Food and Beverage
For example, SaaS companies would opt for using the average order value (AOV) instead, while companies in the technology sectors such as social media companies might use average revenue per user (ARPU).
Average Selling Price Formula
The formula for calculating the average selling price (ASP) is as follows.
Average Selling Price (ASP) Formula
- Average Selling Price (ASP) = Product Revenue ÷ Number of Product Units Sold
The calculation is relatively straightforward, as the equation is simply the product revenue divided by the number of products sold.
If a company offers a diverse range of products, it is recommended to separate the sales out and calculate the ASP on a per-product basis, rather than grouping all products into one.
Interpreting Average Selling Price (ASP)
In general, companies that offer products with higher average selling prices possess pricing power over their customer base.
Most often, the pricing power stems from an economic moat, i.e. a differentiating factor that protects the long-term profits of a company.
For instance, if only one company can develop and sell a highly-technical product, the limited competition and options for customers enable the seller to raise prices, which is the concept of pricing power.
But while pricing power can be a useful lever for increasing revenue, a product priced too high directly causes the number of potential buyers to reduce, i.e. the product cannot be afforded by the buyer.
That said, companies must strike the right balance between setting higher pricing to maximize their revenue while still being capable of reaching enough of the market, where opportunities for expansion and new customer acquisition opportunities exist.
Typically, the average selling price of a product tends to decline from reduced demand for a product and more providers offering the same (or a similar) product, i.e. the product has effectively become commoditized.
Average Selling Price Calculator — Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Average Selling Price (ASP) Example Calculation
Suppose a manufacturer is attempting to determine the average selling price on its past equipment sales from 2019 to 2021.
The manufacturer sells two products, which we’ll separate and refer to as “Product A” and “Product B”.
The financial and product sales data we’ll be working with are as follows.
For each year, we’ll divide the product revenue by the corresponding number of units sold to arrive at the average selling price of each period.
- Product A — Average Selling Price (ASP)
- 2019A = $10 million ÷ 100,000 = $100.00
- 2020A = $13 million ÷ 125,000 = $104.00
- 2021A = $18 million ÷ 150,000 = $120.00
- Product B — Average Selling Price (ASP)
- 2019A = $5 million ÷ 100,000 = $50.00
- 2020A = $6 million ÷ 150,000 = $40.00
- 2021A = $8 million ÷ 250,000 = $32.00
While the average selling price of Product A has increased from $100.00 to $120.00, the ASP of Product B has declined from $50.00 to $32.00.