How Does a Price Markup Work?

Written by cellina laforey
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How Does a Price Markup Work?
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Retailers Make Markups

Retailers, who do not manufacture their own products, make profits by adding a markup to the cost of the products they sell. How much of a markup depends on the type of product and the industry. For example, If Company A sells shoes manufactured by Company B, Company A purchases the shoes at one price and then bumps up the price to account for Company A's costs to get the product to market and profit.

There is more than one way to determine the markup of a product. The reseller may choose to apply a markup to the cost of the product, or calculate a markup based upon the final sales price.

Based on the Cost of the Product.

Some retailers determine the markup as a function of how much they paid for the product. They may deem that an across-the-board markup is sufficient to provide a fair profit in order to keep their business afloat. Therefore, if they purchase a product for £16 and calculate they must earn 25% above the purchase price in order to remain in business, they will sell the product for £20.30.

The reseller spends time and thought before coming up with an across the board markup percentage. She must consider the time, effort and expense involved in marketing, advertising, shipping and presenting the product to the buyer.

Markup Based on Product Selling Price

Some retailers understand that charging an across-the-board markup may not be in their best interest. Therefore, they back into the markup amount based upon what they can sell the product for. For example, if a company knows they can sell a pair of shoes for £42, they must ensure that their cost to purchase the shoes plus profit does not exceed the £42 selling price.

Common New Business Error

Sometimes small business owners and retailers shortchange themselves when it comes to markup. They look at the dollars and cents and forget to include their own time. Time is a valuable commodity and the reseller must factor in her time when determining how much of a markup to place on a product.

Which Calculation to Use

Retailers determine the markup based on a number of factors. Some industries prefer to markup the price based on cost, while others' do better using the mark up based on the sales price. There is no hard-and-set rule when it comes to applying a markup price to a product.

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