Markup (or price spread) is the difference between the selling price of a
good or
service and
cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in whic ...
. It is often expressed as a percentage over the cost. A markup is added into the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a
profit
Profit may refer to:
Business and law
* Profit (accounting), the difference between the purchase price and the costs of bringing to market
* Profit (economics), normal profit and economic profit
* Profit (real property), a nonpossessory inter ...
. The total cost reflects the total amount of both
fixed
Fixed may refer to:
* ''Fixed'' (EP), EP by Nine Inch Nails
* ''Fixed'', an upcoming 2D adult animated film directed by Genndy Tartakovsky
* Fixed (typeface), a collection of monospace bitmap fonts that is distributed with the X Window System
* F ...
and
variable expenses to produce and distribute a
product.
Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.
is commonly calculated as the difference between
wholesale
Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and related subordinated services. I ...
price and retail price, as a percentage of wholesale. Other methods are also used.
Price determination
Profit
*Assume: Sale price is 2500, Product cost is 1800
:Profit = Sale price − Cost
[Farris P.W., Bendle N.T., Pfeifer P.E. and Reibstein D.J. (2010). Marketing metrics : The Definitive Guide to Measuring Marketing Performance, Pearson Education.]
:700 = 2500 − 1800
Markup
Below shows markup as a percentage of the cost added to the cost to create a new total (i.e. cost plus).
*Cost × (1 + Markup) = Sale price
:or solved for Markup = (Sale price / Cost) − 1
:or solved for Markup = (Sale price − Cost) / Cost
*Assume the sale price is $1.99 and the cost is $1.40
:Markup = ($1.99 / 1.40) − 1 = 42%
:or Markup = ($1.99 − $1.40) / $1.40 = 42%
*To convert from markup to
profit margin:
:Sale price − Cost = Sale price × Profit margin
:therefore Profit Margin = (Sale price − Cost) / Sale price
:Margin = 1 − (1 / (Markup + 1))
:or Margin = Markup/(Markup + 1)
:Margin = 1 − (1 / (1 + 0.42)) = 29.5%
:or Margin = ($1.99 − $1.40) / $1.99 = 29.6%
A different method of calculating markup is based on percentage of selling price. This method eliminates the two-step process above and incorporates the ability of discount pricing.
*For instance cost of an item is 75.00 with 25% markup discount.
:75.00/(1 − .25) = 75.00/.75 = 100.00
Comparing the two methods for discounting:
*75.00 × (1 + .25) = 93.75 sale price with a 25% discount
:93.75 × (1 − .25) = 93.75 × .75 = 70.31(25)
:cost was 75.00 and if sold for 70.31 both the markup and the discount is 25%
*75.00 /(1 − .25) = 100.00 sale price with a 25% discount
:100.00 × (1 − .25) = 100.00 × .75 = 75.00
:cost was 75.00 and if sold for 75.00 both the profit margin and the discount is 25%
These examples show the difference between adding a percentage of a number to a number and asking of what number is this number X% of. If the markup has to include more than just profit, such as
overhead, it can be included as such:
*cost × 1.25 = sale price
or
*cost / .75 = sale price
Aggregate supply framework
P = (1+μ) W. Where μ is the markup over costs. This is the pricing 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
In economics, aggregate supply (AS) or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that fir ...
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.
See also
*
Administered prices
*
Cost-plus pricing
*
Marketing
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
*
Markup rule A markup rule is the pricing practice of a producer with market power, where a firm charges a fixed mark-up over its marginal cost.Roger LeRoy Miller, ''Intermediate Microeconomics Theory Issues Applications, Third Edition'', New York: McGraw-Hill, ...
*
Pricing
Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acq ...
References
{{Reflist
Pricing
Profit