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 $82.50
Steps:
1. Determine the dollar markup (RP-C=MU ($)
$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=$33.00
2.To change the dollar markup to the
percentage markup, divide by cost.
MU($)/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 = $3.40
2. Add the dollar markup to the cost to get the retail
price. C + MU($) = RP $8.50 + $3.40 = $11.90
Typical Markup Percentages
Product Category
Typical Markup Percentage
Based on Cost
• Small Appliances
• 30%
(microwave, coffee maker)
• Large Appliances
• 15-20%
(refrigerator, dryer)
• Automobiles
• Automobile Accessories
(sunroof, CD Player)
• Clothing
• 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.
2.
3.
Determine what percentage of the retail price is equal to
cost. RP(%) – MU(%) = C (%)
100%-40%=60%
To determine the retail price, divide cost by the decimal
equivalent of the percentage calculated in step 1.
$6.75/.60= $11.25
Calculate the dollar markup RP – C = MU($)
$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 $16.
Steps
1. Determine the dollar markdown RP x MD(%)= MD ($)
$16 x .25 = $4
2. To determine the sale price, subtract the markdown
from the retail price. RP – MD($) = 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 = $40
2. To determine the maintained markup in dollars (MM$),
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