Markup (or price spread) is the difference between the selling price of a good or service and its marginal cost. In economics, markups are the most direct way to measure market power: the extent to which a firm can influence the price at which it sells a product or service. Markup 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. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product. Markup can be expressed as the fixed amount or as a percentage of the total cost or selling price. Retail markup 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. In ...

price and retail price, as a percentage of wholesale. Other methods are also used. Markdowns refer to the ability of a firm to hold the price it pays for an input below the input's marginal product.

Price determination

Profit

*Assume: Sale price is 2500, Product cost is 1800 :Profit = Sale price − CostFarris 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 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.

References

{{Reflist Pricing Profit

External links