Manufacturers Suggested Retail Price, Discounts, Markups, etc.

 

I was talking to someone the other day about how the had trouble budgeting because they kept receiving emails offering them things for discounted prices.  You know the ones!  This is your last chance before the price goes up, or hey for the next 24 hours, we'll give you this product for 35% off so instead of $47, you can buy it for $17.

Since COVID, I don't think we've done much to teach discounts, mark-ups, and even sales tax.  In addition, when the topic is taught, it doesn't cover things like MSRP or Manufacturers suggested retail price or the price that manufacturers suggest the price be set at. This suggested price is about 2 to 3 times the wholesale price but stores set their own prices.

This is when stores use it to their advantage by using a little sales psychology.  When I was quite young, I asked my dad why prices ended in 9 rather than 0.  He said when the price was $9.99 rather than $10.00 so the customer would feel as if they were getting a bargain.  The same thing with stores that list the MSRP and the price the item is actually being sold for.  This makes it seem as if you are getting a bargain.  Some stores use the term Rollback to persuade you, this is a deal.

The other way is to tell. there is some sort of sale and what you want to buy is marked down a specific amount so instead of paying $52.00, it is only $39 because they've marked it down 25%.  This is the discount they take when you check out.  I don't know if the price printed on the tag is the MSRP or the price the store set but you feel good when you get the deal.    I love shopping the clearance because the discount is being applied to things that have already been discounted.  This is an area that needs clarification for many students because some think that the discounts should be added together.  In other words, if the item is marked down 50% and then reduced another %25, the kids think the item should be marked down a total of 75% rather than the last discount applied to the new price.  

On the other hand, most students are unaware that most merchandise is sold at a lower price by suppliers referred to as wholesale.  Then suppliers markup the price to the amount they sell it for.  Most of us do not know what the markup price is and that markup is not always the same.  It depends on the product.  Usually gas is only marked up some 10 to 15 cents a gallon but out of the markup they only make about 2 cents net profit. 

It is important to take time to teach students about markups, discounts, even profit and net profit so they understand these real world situations, they will end up in at some point.  It is important to know what these terms mean and their application because it is something they run into regularly.  In fact the applications and such are a bit different when in the bush.

Where I live, the stores often order products from the local Costco, have them shipped out and the markup is on top of that. I usually include information on what the markup covers such as the building, salaries, etc.  I try to include one week of this information so students are exposed to it.  Let me know what ou think, I'd love to hear. 

What Does Mark-up Cover

  Yesterday, the last thing I looked at was mark-ups but have your students ever asked why we even discuss markup?  Where does all that money go and are there businesses with bigger markups than others?

Mark-up is used to pay for the rent, benefits, employees, supplies and profit.  I've never really discussed it in detail with my students because I don't usually take the time.

In most retail businesses the standard markup is considered to be 50% which is just doubling the price.  The logic is if you buy a can of soda for $1 and sell it for $2, there is a 50% markup because $1 is half of $2.  This is a great way to show the logic behind the 50% number but mathematically its really a 100% markup because you start with the base number and calculate it that way. 

Add into this topic the idea that a business in rural areas are probably going to have a higher markup than an urban area due to higher transportation costs, fewer customers and other costs.  I live in a place where they have to barge in the fuel before the river freezes in the fall.  By the time the store sells it, it is about $6.25 per gallon where if I were in Anchorage, it would only be around $3.50 per gallon.  Over double the cost.  A half gallon of ice cream is sold for $12 to 15 dollars due to paying air freight to get here.

Most everything sold in the world has a markup but so do services such as temporary agencies.  They charge more than the rate the worker is paid.  The markups are between 20 and 60% or higher but cover the benefits of the worker and money for the agency so it can pay all its bills and make a profit.  The markup depends on the number of workers needed and if the worker has very specialized skills. Someone with specialized skills might have a 200 to 300 percent markup.

The Small Business Administration has a great seven page worksheet you could use in the classroom to show how one goes about identifying fixed costs, variable costs and other factors to determine the amount of markup one should use.  The first two pages are the only ones needed and the students could look up costs or call around to get prices or you could provide the numbers.

Give it a thought because this is a way to get students to apply markups in a real situation.