Markup (business)

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Markup is the difference between the cost of a good or service and its selling price.[1] A
markup is added on to the total cost incurred by the producer of a good or service in order to
create a profit. The total cost reflects the total amount of both fixed and variable expenses to
produce and distribute a product.[2] Markup can be expressed as a fixed amount or as a
percentage of the total cost or selling price.[1] Different methods exist in determining the
markup of a product.

Contents
[hide]
• 1 Initial markup
• 2 Price determination
○ 2.1 Markup as a fixed amount
○ 2.2 Markup as a percentage
○ 2.3 Aggregate supply framework
• 3 See also
• 4 References

[edit] Initial markup

The initial markup is the average markup required on all products to cover the cost of all
items, incidental expenses, and to obtain a reasonable profit. The initial dollar markup is
expressed as a percentage. Initial Dollar Markup = (Operating Expenses + Price Reductions +
Profit) / (Forecasted Net Sales + Price Reductions)[1]
Example:
• Forecasted Sales = $380
• Operating Expenses = $140
• Anticipated Price Reductions = $24
• Expected Profit = $38
($140 + $24 + $38) / ($380 + $24) = 50%
Thus the initial dollar markup on the product should be 50%. Price reductions, or
markdowns, are reductions in the retail selling price when the item cannot be sold at its
intended price and erode into profit. Operating expenses are costs incurred in addition to the
total product cost and can vary depending on the product and service being sold. In reviewing
operating expenses, annualized figures should be used since any individual month may not
properly reflect the expenses incurred over a full year.
Initial pricing of a product is an important step in merchandising. The Keystone Method
doubles cost of an individual product to arrive at its selling price (2 x total product cost ). The
Dollar Markup Method takes into account the total amount of operating expenses and desired
profit. These are then broke down on a per product unit basis, which is then added on to the
total product cost. This addition onto the total cost is the dollar markup.[3] This dollar markup
is either expressed as a percentage of the total cost per unit or the selling price.
[edit] Price determination
[edit] Markup as a fixed amount
• Assume: Sale price = $2500, Product cost is $2000
Markup = Sale price - Cost
$500 = $2500 - $2000
• Assume the actual sale price was $2200
Markdown = List price - Sale price
$300 = $2500 - $2200
Initial Markup = List price - Cost
$500 = $2500 - $2000
Maintained Markup = Sale price - Cost
$200 = $2200 - $2000
[edit] Markup as a percentage
• Cost x (Markup + 1) = Sale price
or solved for Markup = (Sale price / Cost) - 1
• Assume the sale price is $1.99 and the cost is $1.40
Markup = ($1.99 / 1.40) - 1 = 42%
• To convert from markup to profit margin:
Sale price - Cost = Sale price x Profit margin
Margin = 1 - (1 / (Markup + 1))
Margin = 1 - (1 / (1 + .42)) = 29.5%
[edit] Aggregate supply framework
P = (1+μ) W. Where μ is the markup over costs. This is the price setting equation
W = F(u,z) Pe . This is the wage setting relation. u is unemployment which negatively affects
wages and z the catch all variable positively affects wages.
Sub the wage setting into the price setting to get the aggregate supply curve.
P = Pe(1+μ) F(u,z). This is the aggregate supply curve. Where the price is determined by
expected price, unemployment and z the catch all variable.
[edit] See also
• Cost-plus pricing
• Marketing
• Pricing
[edit] References
1. ^ a b c Vickers, Frank (2005). The Dynamic Small Business Manager. Lulu.com.
ISBN 9781411652842.
2. ^ Pradhan, Swapna (2007). Retailing Management. Tata McGraw-Hill.
ISBN 9780070620209.
3. ^ Arena, Barbara (2001). The Complete Idiot's Guide to Making Money with Your Hobby.
Alpha Books. pp. 220. ISBN 9780028638256.
Retrieved from "http://en.wikipedia.org/wiki/Markup_(business)"
Categories: Pricing | Marketing
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