Markup (or price spread) is the difference between the selling price of a
good
In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...
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. The total cost reflects the total amount of both
fixed and
variable expenses to produce and distribute a
product
Product may refer to:
Business
* Product (business), an item that serves as a solution to a specific consumer problem.
* Product (project management), a deliverable or set of deliverables that contribute to a business solution
Mathematics
* Produ ...
.
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. In ...
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
Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue.
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There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin.
* Gross Pro ...
:
: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.
See also
*
Administered prices
*
Cost-plus pricing
Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (a " markup") to the product's unit cost. Essentially, the markup percentage is a method of generating a particular ...
*
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
*
Pricing
References
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Pricing
Profit