For example, if a product costs the retailer $10 and his markup is 20%, the selling price for this product would be $12, which is the original cost of the product plus the retailer’s markup. Most retailers have a fixed markup value that they apply to different products.
By doing so, they don’t have to price products separately. For most retailers, this would be time-consuming in a way that makes it unfeasible. That’s why the markup pricing technique is so popular.
Despite being so practical for pricing multiple products quickly, the markup pricing technique isn’t perfect. There are pros and cons that are related to this technique that make it perfect in some cases and bad in others.
The following are the most important considerations that you should keep in mind when using the markup pricing method. By doing so, you’ll be able to price your products in a profitable way without losing your competitive edge.
There is more than just the wholesale price
This is a common mistake that’s made by retailers when using the markup pricing technique. Despite the fact that the wholesale price is what you pay to acquire the product as a retailer, this isn’t the “actual cost” of the product that you’re selling.
There are other things that add up to this cost that you need to take into consideration when setting your markup price for a product. These things are often costs, that are related to shipping the products and running the store, whether directly or indirectly.
In addition to that, you should also factor in the discounted prices that you’ll need to sell some of your products for. If you don’t do that, the actual profit margin of the markup price that you’ve set will turn out to be lower than what you calculated. You can even be losing money on your markup price if you’re not careful about the extra costs.
Prices must remain relevant to the competitors’
One of the best things about the markup pricing technique is that you can just set it and forget it. After calculating a profitable markup for their goods, most retailers just apply that to all new products and rarely bother to recalculate that margin.
When that’s the case, you risk having your prices become less competitive. This is particularly true if you’re in a price-sensitive market. If competitors lower their prices without you making a similar adjustment, they may end up taking your market share.
Markup Pricing: Advantages and Disadvantages
The following are the main advantage and disadvantage that are associated with the markup technique. Knowing these will help you evaluate if markup pricing is right for your business or not.
Fast and suitable for pricing multiple items
This is the major advantage that’s associated with this pricing technique. It goes without saying that markup pricing is great when used with multiple items. Instead of spending countless hours pricing every product individually, you find a markup price that works for you and apply it to everything.
In some business models where there are plenty of different products involved, this isn’t just convenient, it’s necessary. Traditional pricing methods will more likely mean that owners of similar businesses will spend most of their time pricing instead of running their business.
Less than optimum profit margins
The downside of pricing products based on their cost is that you could be losing profits from products that can be sold for more. This is a major downside of the markup pricing technique that you should consider before using it.
In some markets, products can fetch higher profit margins and are therefore worth the time spend pricing them. While in other cases, this is a time that’s entirely wasted as the lost profits from using a markup are a negligible amount compared to the time saved. Knowing this will help you decide if markup pricing is right for your business model or you’re better off with anything pricing technique.
How can Sniffie help?
Markup pricing can help you save lots of time by pricing products quickly. If you don’t keep up with the prices of your competitors though, you can end up losing lots of money. This will happen if your prices are over or underpriced. In one case you’ll lose your customers and in the other, you’ll have lower profit margins. And that’s where Sniffie can help.
How to use markup pricing
- Find out the cost price of the product that you’re selling.
- Calculate the hidden fees.
- Add a markup that’s profitable for you and competitive in your market at the same time.
- Retailers use it to quickly price different products by adding a markup value to their cost price, which is usually the price they bought it for plus any other costs.
- Don’t forget to calculate any hidden costs like shipping, staff wages, etc.
- Study the market you’re in to make sure your markup price gives you maximum profitability.
- Always keep an eye on your competitors’ price to make sure yours are competitive enough.