Things that Beginners must know about Markup Pricing

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9 years ago 8

According to former article The Method of Pricing , I promise you to discuss about price setting method more detail. At this time, I will explain you one of the method of pricing, namely markup pricing.

In this article, you will get understanding about markup pricing definition, markup pricing formula, and mark-up pricing examples.

Markup pricing meaning:

Markup pricing is one of pricing approaches that adding some amount of numbers from product's cost. You can say it markup cost for the simple saying.

Many companies use markup pricing strategy to launch new product to test a market. Because pricing is a flexible action, so you can adjust the current price to respond the result of market testing.

Another markup pricing definition: amount of money plus cost of the product.

For the sake of simplicity, you can see the definition in formula form as written below:

Price = Cost of production + markup

Above is standard markup pricing formula.

This markup pricing method is also named cost-plus pricing.

The goal of markup

Markup is set to cover overhead cost, operational cost, product's cost, and to obtain profit.

Markup pricing formula

Setting a markup

Commonly, markup is set by percentage of production cost. So the formula is like below:

Price = production cost + (% x production cost)

In this chapter, I will introduce you two pricing term that are related to markup pricing, they are:

MUC = Markup on Cost
MUSP = Markup on sales price

Markup on Cost

The formula of markup on cost (MUC) is

MUC = cost / (1 – % Markup)

Markup on sales price

The formula of markup on sales price (MUSP) is

MUSP = MUC / ( 1 + MUC )

You can see the relationship between MUC and MUSP in the picture below:

the relation between markup on cost and markup on sales price

MUC and MUSP implementation

Markup on Cost is usually used by manufacturer / producer, whereas Markup on sales price is usually used by wholesaler or retailer.

Markup pricing examples

Suppose you are the manufacturer. Your distribution channel is not direct selling, but the flow is You – Distributor – Retailer – End Consumer.

It means, before your product reaching to the customer, it flows to distributor first, and then retailer. The retailer is one to one with customer.

Based on the theory you as manufacturer is using MUC (markup on cost).

1. You have developed product A.

2. Total cost to create product A is 2000.

3. You decide to have a markup 20% , so the formula is:

MUC = 2000 / (1 – 20%) = 2000 / 80% = 1600

Price = Cost + Mark up on Cost = 2000 + 1600 = 3600.

4. So, you sell to your distributor, and price for distributor is 3600.

5. Then distributor is using MUSP, the formula is:

MUSP = 20% / ( 1 + 20% ) = 16.67%

Price = 3600 + (16.67% x 3600) = 3600 + 600 = 4200.

6. So, distributor sell to the retailer, and price for retailer is 4200.

7. Then retailer is free to have 20% margin, so retailer sell to the end consumer. And the price

will be 4200 + (20% x 4200) = 4200 + 840 = 5040.

Finally customer will pay 5040 to buy product A from Retailer.

Advantages of markup pricing

Setting a price is more simple.
If all the company in one industry implement this pricing method and use the same percentage, then the pricing competition is lesser.

Disadvantages of markup pricing

If cost is increasing, then sales price will increase also.
As a consequences, the marketing effort will tight, if your price increase whereas your competitor has lesser price than you.

Above are the explanation and examples how to calculate mark up on cost. I will explain another product pricing models in the next article.

If you want to deep understanding about pricing , see my previous article, go to sidebar and click one of the category / label namely pricing.

Thank you for reading, if you found this article is beneficial for you, please share this to your friend. So, they will understand about basic pricing and how to set pricing strategy also.

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