To calculate the initial markup for a product that you’re pricing, you need to know the cost and the selling price of that product. The difference between these two is the initial markup.
Selling Price – Product Cost = Initial Markup
For example, if you’re selling a product for $100 and it has a total cost of $50, the markup value $50. When expressed as a percentage, the initial markup value for this product is %100.
It’s true that this pricing technique has been around for a long time and is being used by many businesses. However, initial markup has its downsides. If you’re aware of these downsides when using this technique, you’ll be able to make the most out of it.
Despite being seemingly simple, there are multiple factors that come into play when calculating the IMU. Disregarding some of these points can result in an inaccurate calculation, which can have serious consequences on the bottom line of your business.
The following are the most important considerations to keep in mind when using the initial markup pricing method. Being aware of these factors will help you reap the benefits of IMU while mitigating the downsides.
If you’re in retail, you probably already know that markdowns are the biggest cost for retailers. Nobody likes to sell their products at reduced prices, however, this is something that has to be done.
Sales and discounts allow you to get rid of slow-selling products without taking a loss. One common mistake when using the initial markup technique is not factoring the markdown prices into the calculations.
If you do this, you’ll find out that your profit margins have dropped significantly when selling the products at discounted prices. In addition to the lowered profitability, you won’t be able to wow your customers with a big sale.
Having one of these big %50-off sales requires that you price your products with such sales in mind in the first place. If you don’t do this, you’ll find yourself stuck with products that you’re not able to sell. Unless you run a business that’s never on sale, this is something that you should always pay attention to.
Hidden Operating Costs
Miscalculating the actual cost of a product when using IMU is pretty common. This is especially true when using the same initial markup for different products or even for a single product that’s being sold in different stores.
The reason for this miscalculation is simple, which is the hidden operating costs. When you’re manufacturing your product in a single place, the manufacturing cost for the product is the same. What isn’t the same though, is the operational cost of different stores, which add up to the overall cost of a product.
Let’s say that you have a store in Helsinki with a product that costs $5 to make and you’re selling it for $15. The markup here is %200 percent which is $10 per item. When you sell that item in a more expensive city like London -which is %30 more expensive on average, the profit for selling the same product with the same markup will be significantly lower.
When calculating your IMU, make sure to take the different operating conditions of each store into consideration and adjust your prices accordingly.
Initial Markup: Advantages and Disadvantages
Initial markup is a powerful pricing method that has its own pros and cons. Whether it’s right for your business or not is something that only you can decide. The following are the major advantage and disadvantage of using this technique.
Making Sales and Profits Calculations Easier
Simple all pricing-related calculations are a major advantage that’s associated with the initial markup technique. By having an IMU formula, you can price many products and calculate profits with ease. All you have to do is fill in the blanks of your IMU pricing formula and you get the price for any of your products.
Since percentages are used with this method, seeing the big picture becomes easier and requires less work.
The major disadvantage of using initial markup when pricing your products is directly related to its advantage, which is having the same formula used for multiple products. When this is the case, some products might end up with a pricing that’s less than the optimal.
Whether this is acceptable for your business or not depends on things like the size of your business as well as the number of products that you’re selling. In some cases, this is a negligible disadvantage while in others it can be a huge deal.
How can Sniffie help?
Setting a proper initial markup for the products that you’re pricing can make the whole process much easier. In order for that to happen, you need to know things like the total cost of your products as well as your competitors’ prices.
By knowing these things, you’ll be able to set an initial markup that that strikes the perfect balance between profitability and being competitive. Instead of doing this time-intensive research yourself and risk getting inaccurate results, you can use Sniffie.
How to use initial markup
- Calculate the cost of the item that you’re pricing.
- Make sure to calculate all the hidden costs that go into manufacturing that item.
- Know the net profit margin that you want to achieve.
- Take into consideration any future price reduction you have to do on the item.
- Set the initial markup accordingly.
- Used to create a markup percentage for a product that you’re pricing.
- Always calculate your initial markup percentage based on the retail price.
- Make sure your cost price covers all hidden costs.
- Make sure the items you’re pricing with the same initial markup have the same cost structure.
- Setting the initial markup for your products as a percentage makes it easier to work with later on and to determine which products are more profitable.
- When calculating the initial markup, always include the operating expenses, expected markdowns as well as your net profit.