Common Price Setting Methods - Mark-Up

Common Price Setting Methods

Price

The price you charge for goods and services you provide must be sufficient to cover all expenses and allow for the desired profit to be made. A number of price setting methods are available. The particular method used by business will depend, in part, on the type of business being operated.

This article is about Price

Mark-up on cost

Some businesses, particularly retail businesses, apply a set mark-up to the cost of an item to determine their selling price.

Example:

A ladies fashion retailer may apply a mark-up of a 100% on all dresses 50% of all jumpers. Therefore, if the retailer pays at cost price of .00 for a dress, the selling price will be:

.00 + (.00 x 100%) = 0.00 (mark-up 100%)

If the retailer pays the cost price of .00 for a jumper, the selling price will be:

.00 + (.00 x 50%) = .00 (mark-up 50%)

If you use mark-up on cost as the basis for determining your prices, you need to be flexible in applying the mark-up. There are two reasons for this. Firstly, blindly applying the same mark-up indiscriminately to a range of products can cause a business to have similar products priced at similar but different prices, which can complicate the buying decisions of customers.

For example, applying a constant mark-up may mean that a shoe retailer may have shoes priced at: .00, .50, .50, .00, .95 and .00. This makes the buying decision harder for the purchaser. If all these shoes were priced at say .50, the buying decision becomes much easier.

Secondly, applying a constant mark up without consideration may lead to poor stocking decisions. For example, the ladies fashion retailer may apply a mark-up of 100% to all dresses. The retailer may have the option of buying two different dresses, dress A and dress B, for 0.00 each. By applying a constant mark-up of 100% the retailer would price both dresses at 0.00. She may believe she can sell a limited number of dress A at this price and therefore stock dress A. On the other hand, she may believe that she could not sell dress B at this price, and therefore decide not to stock the item. However, by applying a mark-up of 80% to this item instead of 100%, the retailer may have been able to sell three times as many dress B's as dress A's. But by using the 100% mark up religiously, and in using the price so obtained in reaching stocking decisions, the retailer has forgone this opportunity.

Mark-up on cost can be a good guide for setting prices and is often used by retailers. However, it needs to be used as a guide only and used with flexibility. The mark-up used will vary from industry to industry and according to the type of goods being sold. The mark-up needs to be sufficient to cover all costs and provide the desired level of profit for the business.

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