Pricing Math

Chapter 27

Basic Pricing Concepts

• Markup pricing: the difference between the price of an item and its cost that is generally expressed as a percentage. – Markups on products must be high enough to cover expenses and

included intended profit

• Cost-plus pricing: all costs and expenses are calculated, and then the desired profit is added to arrive at a price.

• Demand-oriented pricing: determine what consumers are willing to pay for given goods and services.

Profit vs. Markup

• Profit is the amount left from revenue after the costs of the merchandise

• Markup is similar to gross profit– Gross profit: difference between sales revenue

and the cost of goods sold.

• A business must have a markup high enough to cover expenses and provide the profit to be successful.

Basic Markup Calculations

• Same formulas to calculate markups in every industry:Cost (C) + Markup (M) = Retail Price (RP)

• Two other formulas can be derived from this basic formula – cost and markup:Retail Price (RP) – Markup (MU) = Cost (C)

Retail Price (RP) – Cost (c) = Markup

Practice 1

• Use the retail price formula and its variations to do the following problems:1. A calculator costs AB Products $15, and the

markup is $10. What is its retail price?

2. A tennis racket retails for $175, and its markup is $85. What is its cost?

Percentage Markup

• Companies choose to base the markup on retail price for three reasons:1. The markup on the retail price sounds like a

smaller amount.

2. Future markdowns and discounts are calculated on a retail basis.

3. Profits are generally calculated on sales revenue.

Steps used to Calculate Percentage Markup

• Assume you want to calculate the percentage markup on a pair of bookends from Target:– Cost is $49.50 and sells for $82.50Steps:1.Determine the dollar markup (RP-C=MU ($)

$82.50-$49.50 = $33.00

2.To change the dollar markup to the percentage markup, divide it by the retail price. MU ($)/RP=MU (%) on retail$33.00/$82.40 = .40

3.Change the decimal to a percentage. This figure is percentage markup on retail..40 = 40%

Percentage Markup on Cost

Steps:1.Determine the dollar markup RP-C=MU($)

$82.50-$49.50=$33.002.To change the dollar markup to the

percentage markup, divide by cost. MU($)/C=MU(%) on cost $33.00/$49.50=.6667

3.Change the decimal to the percentage. This is the percentage markup on cost..6667=66.67%

**Do practice 2 problem on page 486

Markup Equivalents Table

• Page 487 – do problems.

Cost Method of Pricing

• Sometimes marketers know only the cost of an item and its markup on cost.

• Consider a board game that Toys R’ Us buys for $8.50 and sells for a cost plus a 40 percent markup on cost.

To find retail price:1. Determine the dollar markup on cost. C X MU(%)

= MU($) $8.50 x .40 = $3.402. Add the dollar markup to the cost to get the retail

price. C + MU($) = RP $8.50 + $3.40 = $11.90

Typical Markup PercentagesProduct Category

• Small Appliances (microwave, coffee maker)

• Large Appliances (refrigerator, dryer)

• Automobiles

• Automobile Accessories (sunroof, CD Player)

• Clothing

Typical Markup Percentage Based on Cost

• 30%

• 15-20%

• 5-10% (*note dealers make money on factory incentives and sale of accessories)

• 15-25%• 100%

Retail Method of Pricing

• Another way to compute the retail price when all you know are cost and markup on retail is to use the retail method.

• Example: Owner of sporting goods store wants to know the what the markup and retail price should be for a sun visor that costs $6.75

Steps for Retail Method of Pricing

1. Determine what percentage of the retail price is equal to cost. RP(%) – MU(%) = C (%)100%-40%=60%

2. To determine the retail price, divide cost by the decimal equivalent of the percentage calculated in step 1. $6.75/.60= $11.25

3. Calculate the dollar markup RP – C = MU($)$11.25 - $6.75 = $4.50

4. Check your work by multiplying the retail price you calculated in Step 2 by the percentage markup on retail given originally. Answer should match dollar markup calculated in step 3.

RP X MU (%) = MU($)$11.25 x .40 = $4.50

Markdowns

• To reduce the quantity of goods in stock, a business will sometimes mark down merchandise by a certain percentage.

• Reduction is based on retail price.Example: Record store wants to mark down by 25 percent CDs that originally sold for $16.

Steps1. Determine the dollar markdown RP x MD(%)= MD ($)

$16 x .25 = $42. To determine the sale price, subtract the markdown

from the retail price. RP – MD($) = SP$16 - $4 = $12

Practice Problem

• Calculate the sale price:

A suit that sells for $225 is to be marked down 40 percent. What is its new price?

Answer is…

• $135

100%-40% = 60%; $225 x .60 = $135

Maintained Markup

• When a marketer marks down goods, the markup and markup percentage change.

• The difference between an item's final sale price and its cost is called the maintained markup.

• Reductions in the original retail price include employee discounts, damaged goods allowances and special sales events.

Example of Maintained Markup• Assume that a cassette recorder that cost Best Buy $25 and

originally sold for $50 is marked down 20 percent. Maintained Markup is calculated as follows:1. Calculate the new sale price 100%-20%=80%

$50 x .80 = $402. To determine the maintained markup in dollars (MM$),

subtract cost from sale price (SP)SP – C = MM($) $40 - $25 = $15

3. To determined (MM%) divide (MM$) by Sale price (SP)MM($) / SP = MM(%)$15/$40=.375 37.5 percent

Discounts

• Discount is a reduction in the price of goods and services sold to customers.

• Ways to discount:– Retailers offer discounts to their employees

as a job benefit – Manufacturers and distributors offer discounts

to their customers to encourage prompt payment and stimulate business.

Steps To Calculate Discounts

1. Multiply Price (P) by the discount percentage D(%) to get the dollar amount of the discount D($) P x D(%) = D($)

2. Subtract the discount from the price to get the net price (NP) or the amount that customer will actually pay.

P – D($) = NP

Example

• A business is offering a 35 percent discount on an item that sells for $150

Answer

• $150 x .35 = $52.50 D($)

• $150 – 52.50 = $97.50 (NP)

Employee Discounts

• Encourages workers to buy the products they sell or manufacture.

• Employees who buy and use their company’s products project confidence in and enthusiasm about the products.

• Discounts range from 10 percent to 30 percent for entry level employees

• Can be from 50 percent and higher to top level executives

Look at calculations of discounts

• Page 493-495