Calculating Markup For Real!

 

The other day, I realized that we teach students how to calculate markup using a standard formula but how do businesses determine the percent markup or why an adequate markup is important.  Most every markup problem I've seen in math books tend to be ones you are given everything you need to do it without any explanations.

For businesses to sell products so they can. make a profit, they have to figure out the best amount so they can sell enough products.  So a markup is the difference between the unit cost of the item and its sales price.  If you choose a price that is too low, you won't make any profit and end up in bankruptcy. 

In addition, one has to look at the type of business, margins, and your clientele to determine the markup you want. For a professional service, one has to look at past experience to help set the price and one needs to connect the brand to its financial availability.  Then one has to factor in the unique selling proposition which is determined on the accessibility.  For instance, in the cyber security training market, the only real limit is capacity but this changes from market to market. 

Finally, is the pricing strategy which could be one of several.  It might be pricing penetration where the business penetrates the market by offering services at the lowest price they are comfortable offering to get clients, testimonials, and recommendations before raising the price. One also has to keep in mind the number of competitors and their prices because if one hopes to attract clients, it is important to price slightly lower than the competition and not higher than the majority of them. 

In fact, for most businesses, it is important to find a niche where one does not have tons of competition, find a price that is slightly lower or consistent with them, and if you have to make the product, consider the cost of manufacturing it.   In other words, keep in mind the break even point for the product so you don't go below that and what price the market is willing to tolerate.  

As you can see, the markup is not a simple, add a specific percent to the unit cost of the product.  It has to take into account so many different factors in order to determine what it should be.  Although it may seem as though customers want the cheapest item they can find, the reality is they want to feel as though they are getting their moneys worth so if the price is set a bit higher, the customer needs to feel it is worth the extra cost.  

I admit, I never realized that the markup we see in the classroom does not always reflect markup in real life.  Now there are some industries where the markups are fairly standard such as in catering, gas stations, etc and often do not run more than 50 percent.  I've looked at markup in business where it varies more.  Let me know what you think, I'd love to hear.  Have a great day.