Pricing Academy Article
Markup pricing as a pricing strategy
When it comes to pricing multiple products in a fast and efficient way, markup pricing is often the go-to pricing strategy for retailers. The relative simplicity and scalability of this technique makes it the only logical choice in some cases.
This pricing technique —also known as cost-based pricing— is based on adding a markup to the cost of a product. By doing so, retailers can easily price multiple products based on the desired profit margin, without having to do this on a case-by-case basis. Let’s look at an example to make this concept more clear.
How does markup pricing work?
If a product costs the retailer $10, and they have a markup of 30%, the retail price of that product would be $13. These $13 include the product’s cost of $10 and the gross profit of the retailer, which is $3 for the 30% markup.
By setting the markup as a percentage, retailers can get set the price for any product just by knowing its cost. All they have to do is multiply the cost by their desired profit margin, and they’ll get the retail price.
Despite being a relatively easy-to-use pricing strategy, markup pricing isn’t the best choice for all situations. To determine whether this pricing strategy is right for your business or not, you need to consider its pros and cons. By doing so, you’ll be able to decide if the pros will outweigh the cons for your particular case.
Pros and cons of markup pricing as a strategy
1. Great for bulk pricing
Some retailers have hundreds of products to price, and doing this one product at a time is not an option. Not to mention lots of new products coming in all the time, which makes the process even more complicated.
If this sounds like your business, markup pricing could be the solution you’re looking for.
Just set a profit margin as a percentage, multiply by each product’s cost, and you’re done. This will save the cost of the decision making that you would need with other pricing methods. Another option is of course to use some sort of pricing automation software, such as Sniffie in which you can set complex strategies and let the computer take care of the rest.
2. Requires less information
Pricing products the “right way” requires lots of information. You need to know everything from the product’s cost to the current market demand for that product. With markup pricing, all you need to know is how much the product costs. And by how much it costs, we mean the total cost, including all the operational fees.
While doing in-depth research before pricing a product is generally a good idea, it’s not possible —nor feasible— in all industries. And that’s where this pricing strategy truly shines.
Cons of the markup pricing strategy
1. Promotes operational inefficiency
For any business, lowering the operational and manufacturing costs of any product means increased revenues. That’s the optimal scenario though because when you’re using markup pricing, this is hardly the case.
Since you’re multiplying your cost by a profit margin anyway, lowering costs won’t make much difference. You’re making 30%, regardless of the costs. In fact, if the costs are higher, your profit margin should increase as well. Unless the competition is fierce enough to make efficiency a must, using this pricing strategy could provide an incentive for being inefficient.
2. Could lower your profit margins
While bulk pricing is a great idea when you’re selling hundreds of different products, it’s a bad idea for other products. If you’re selling something that’s considered unique or innovative, people might be willing to pay more for it than you think. If you use markup pricing with such products, you could be leaving money on the table.
For businesses with few products that people are willing to pay a premium for, markup pricing isn’t the right pricing strategy.
Important considerations for successful markup pricing
Despite seeming like a straightforward solution for all your pricing needs, this pricing strategy isn’t as simple as it sounds. If you want to make the most out of markup pricing, there are a few considerations that you should keep in mind. By doing so, you’ll ensure the best outcome when using this technique.
1. Operational costs
When calculating the cost of a product, many businesses might overlook the operational cost. Since this entire pricing method is based on knowing the exact price of your product, not taking these costs into consideration can cause all sorts of problems.
In addition to the wholesale or manufacturing cost of a product, you should factor in different costs that you must incur to sell that product. These can be shipping costs, store rent, and even the wages you pay for the staff operating the store.
For some businesses, these costs can add up pretty fast and when they’re not accounted for, your actual profit margin might be much lower than what you’ve initially calculated. And for some products, you might even be losing money on each unit you sell.
2. Your competitors’ prices
Even though markup pricing is based on your actual cost per product and your profit margin, there are lots of competitors out there. If you want your products to sell well, you should keep an eye on those competitors, and the prices of your products.
If the cost of your products is too high, you might end up with prices that are too high to compete. In this case, you’ll need to lower either the cost of the product or your profit margin to stay competitive.
3. Market demand
Price changes have a direct effect on product demand. Before you set the profit margin that you’re going to use with your markup pricing, you should consider the impact of the final price on the demand for your products.
If analyzing the impact of your new prices on demand is feasible, you should do this as a part of your pricing process. By doing so, you’ll avoid any unwanted customer reactions to your new prices.
For businesses with lots of products that need to be priced fast, markup pricing —also known as cost-based pricing— is the most promising pricing technique they can use. It can be used to price products in a fast and scalable way with clear profit margins.
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