For many consumer products, price determination is accomplished using a few simple formulas for calculating the cost of production and the desired markup in order to produce profit.

For many consumer products, price determination is accomplished using a few simple formulas for calculating the cost of production and the desired markup in order to produce profit.

Many retailers desire to mark up their merchandise by 20% to 100% margin and market to consumers at this pricing. Retailers must walk a fine line between marking up too high and too low as pricing will be dependent upon how markets are responding.

Based on demand, the market may respond well to a higher markup, especially for luxury items. As the market fluctuates, prices may need to be varied using the following principles.

Let’s start by introducing Gross Margin. Gross Margin is typically seen as Profit Margin, or the difference in the selling price and total cost divided by the selling price as seen below.

Gross Margin Percent = (Sell Price – Cost) ÷ Sell Price

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Gross Margin Percent = ($6.50 – $5.00) ÷ $6.50

Gross Margin Percent = $1.50 ÷ $6.50

Gross Margin Percent = 23%

 

Conversely, if there is a specific Gross Margin desired the following formula can be applied.

Sell Price = Cost ÷ (1 – Gross Margin)

Sell Price = $5.00 ÷ (1 – .23)

Sell Price = $5.00 ÷ $0.77

Sell Price = $6.50

In order to determine the appropriate retail pricing, one must know the production cost per item. This price would include all manufacturing costs as well as cost of delivery to point of sale. Some examples would include labor, transportation, warehousing, and marketing. There may be others, but these are a few to give you an idea.

To help express the method for markup, here is a simple formula that can be employed.

Sell Price = Cost x (1 + Mark-Up Percent)

Sell Price = $5.00 x (1 + 0.30)

Sell Price = $5.00 x (1.30)

Sell Price = $6.50

This formula shows that if you want to make a 30% markup on $5.00 you must charge $7.00 to make your goal markup. This would provide a margin of 30% above the overall cost of getting the product to point of sale. As we explained above, your gross profit would be 23% using the example prices.

Now let’s touch on Mark Up Percent. This helps us determine what our markup is given current market conditions. In other words, we have a cost, and we have a price, now we need to determine what our Mark Up Percent is.

To help us determine this, we will use another formula.

Mark-up Percent = (Sell Price – Cost) ÷ Cost

Mark-up Percent = ($6.50 – $5.00) ÷ $2.00

Mark-up Percent = $1.50 ÷ $5.00

Mark-up Percent = 30%

Given fluctuations in market conditions, we may decide to change our pricing to meet the demands of consumers. This formula shows how we can change our price and still know what percentage markup we are applying.

Overall, determining your Markup Pricing and your Gross Profit will be dependent upon market, and demand. These 2 ever changing factors will drive your pricing, however, using the formulas provided you will be able to forecast and adjust your pricing appropriately putting you in the driver’s seat in relation to your Markup Price and Gross Profit Margins.