Pricing using the Markup Method

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1.   MARKUP PRICING

Markup pricing is very common among manufacturers, wholesalers, retailers, and service providers, largely due to its simplicity. The markup pricing method, calculates all the costs of purchasing or producing the product and then adds a desired markup to it.

To illustrate the markup pricing method, suppose you open a retail computer store and sell one brand of Pentium computer. Each computer costs you $1,150 plus $50 shipping & handling. Therefore, each computer costs $1,200 to buy and have shipped to your place of business. Using the markup pricing method, you would simply decide on a desired gross margin and markup the price accordingly. If you markup the price by 50% of cost, then you'll make $600 from the sale of each computer. That is: 50% x $1,200 = $600. Therefore, your selling price on each computer would be $1,800 ($1,200 cost + $600 markup = $1,800).

The above example deals with a markup based on cost, however, many businesses like to translate markups on cost into what is known as a markup based on selling price. To calculate a markup based on selling price, you simply divide the product's planned dollar markup by the product's planned selling price. For instance, the markup on selling price, using the above example, would be calculated like this;

    Markup % on selling price       =         Dollar Markup
                                                                Selling Price

    Markup % on selling price      =             $    600        =      33.3% 
                                                                  $ 1,800

 

Therefore, the markup on cost is 50% and the markup on selling price is 33.3%. Although the percentages are different, the profit made on each computer sold remains at $600.

The markup pricing method used to determine your prices is simple to calculate, however, it ignores two important variables - your competitors' prices and consumer demand for the product. For these reasons, many critics feel the markup pricing method is not the "best" pricing approach. Yet many manufacturers, wholesalers, retailers, and services use this pricing method for the following reasons;

  • It is a simple method for setting prices;
  • Prices usually are uniform when other businesses within the same industry use this type of pricing;
  • Many feel it presents an impartial form of pricing for customers;
  • Frequent changes in pricing is not required since supply and demand is not a major factor when using this method to set prices.

 

SUMMARY OF MARKUP PRICING:
Markup pricing uses product costs and percentage markups to calculate the selling price of a product; and it ignores operating expenses (marketing & administration expenses).

Categories: Marketing