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Pricing Math

Pricing Math. Chapter 27. Basic Pricing Concepts. Markup pricing: the difference between the price of an item and its cost that is generally expressed as a percentage. Markups on products must be high enough to cover expenses and included intended profit

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Pricing Math

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  1. Pricing Math Chapter 27

  2. Basic Pricing Concepts • Markup pricing: the difference between the price of an item and its cost that is generally expressed as a percentage. • Markups on products must be high enough to cover expenses and included intended profit • Cost-plus pricing: all costs and expenses are calculated, and then the desired profit is added to arrive at a price. • Demand-oriented pricing: determine what consumers are willing to pay for given goods and services.

  3. Profit vs. Markup • Profit is the amount left from revenue after the costs of the merchandise • Markup is similar to gross profit • Gross profit: difference between sales revenue and the cost of goods sold. • A business must have a markup high enough to cover expenses and provide the profit to be successful.

  4. Basic Markup Calculations • Same formulas to calculate markups in every industry: Cost (C) + Markup (M) = Retail Price (RP) • Two other formulas can be derived from this basic formula – cost and markup: Retail Price (RP) – Markup (MU) = Cost (C) Retail Price (RP) – Cost (c) = Markup

  5. Practice 1 • Use the retail price formula and its variations to do the following problems: • A calculator costs AB Products $15, and the markup is $10. What is its retail price? • A tennis racket retails for $175, and its markup is $85. What is its cost?

  6. Percentage Markup • Companies choose to base the markup on retail price for three reasons: • The markup on the retail price sounds like a smaller amount. • Future markdowns and discounts are calculated on a retail basis. • Profits are generally calculated on sales revenue.

  7. Steps used to Calculate Percentage Markup • Assume you want to calculate the percentage markup on a pair of bookends from Target: • Cost is $49.50 and sells for $82.50 Steps: • Determine the dollar markup (RP-C=MU ($) $82.50-$49.50 = $33.00 • To change the dollar markup to the percentage markup, divide it by the retail price. MU ($)/RP=MU (%) on retail $33.00/$82.40 = .40 • Change the decimal to a percentage. This figure is percentage markup on retail. .40 = 40%

  8. Percentage Markup on Cost Steps: • Determine the dollar markup RP-C=MU($) $82.50-$49.50=$33.00 • To change the dollar markup to the percentage markup, divide by cost. MU($)/C=MU(%) on cost $33.00/$49.50=.6667 • Change the decimal to the percentage. This is the percentage markup on cost. .6667=66.67% **Do practice 2 problem on page 486

  9. Markup Equivalents Table • Page 487 – do problems.

  10. Cost Method of Pricing • Sometimes marketers know only the cost of an item and its markup on cost. • Consider a board game that Toys R’ Us buys for $8.50 and sells for a cost plus a 40 percent markup on cost. To find retail price: • Determine the dollar markup on cost. C X MU(%) = MU($) $8.50 x .40 = $3.40 • Add the dollar markup to the cost to get the retail price. C + MU($) = RP $8.50 + $3.40 = $11.90

  11. Typical Markup Percentages Product Category Typical Markup Percentage Based on Cost 30% 15-20% 5-10% (*note dealers make money on factory incentives and sale of accessories) 15-25% 100% • Small Appliances (microwave, coffee maker) • Large Appliances (refrigerator, dryer) • Automobiles • Automobile Accessories (sunroof, CD Player) • Clothing

  12. Retail Method of Pricing • Another way to compute the retail price when all you know are cost and markup on retail is to use the retail method. • Example: Owner of sporting goods store wants to know the what the markup and retail price should be for a sun visor that costs $6.75

  13. Steps for Retail Method of Pricing • Determine what percentage of the retail price is equal to cost. RP(%) – MU(%) = C (%) 100%-40%=60% • To determine the retail price, divide cost by the decimal equivalent of the percentage calculated in step 1. $6.75/.60= $11.25 • Calculate the dollar markup RP – C = MU($) $11.25 - $6.75 = $4.50 • Check your work by multiplying the retail price you calculated in Step 2 by the percentage markup on retail given originally. Answer should match dollar markup calculated in step 3. RP X MU (%) = MU($) $11.25 x .40 = $4.50

  14. Markdowns • To reduce the quantity of goods in stock, a business will sometimes mark down merchandise by a certain percentage. • Reduction is based on retail price. Example: Record store wants to mark down by 25 percent CDs that originally sold for $16. Steps • Determine the dollar markdown RP x MD(%)= MD ($) $16 x .25 = $4 • To determine the sale price, subtract the markdown from the retail price. RP – MD($) = SP $16 - $4 = $12

  15. Practice Problem • Calculate the sale price: A suit that sells for $225 is to be marked down 40 percent. What is its new price?

  16. Answer is… • $135 100%-40% = 60%; $225 x .60 = $135

  17. Maintained Markup • When a marketer marks down goods, the markup and markup percentage change. • The difference between an item's final sale price and its cost is called the maintained markup. • Reductions in the original retail price include employee discounts, damaged goods allowances and special sales events.

  18. Example of Maintained Markup • Assume that a cassette recorder that cost Best Buy $25 and originally sold for $50 is marked down 20 percent. Maintained Markup is calculated as follows: • Calculate the new sale price 100%-20%=80% $50 x .80 = $40 • To determine the maintained markup in dollars (MM$), subtract cost from sale price (SP) SP – C = MM($) $40 - $25 = $15 • To determined (MM%) divide (MM$) by Sale price (SP) MM($) / SP = MM(%) $15/$40=.375 37.5 percent

  19. Discounts • Discount is a reduction in the price of goods and services sold to customers. • Ways to discount: • Retailers offer discounts to their employees as a job benefit • Manufacturers and distributors offer discounts to their customers to encourage prompt payment and stimulate business.

  20. Steps To Calculate Discounts • Multiply Price (P) by the discount percentage D(%) to get the dollar amount of the discount D($) P x D(%) = D($) • Subtract the discount from the price to get the net price (NP) or the amount that customer will actually pay. P – D($) = NP

  21. Example • A business is offering a 35 percent discount on an item that sells for $150

  22. Answer • $150 x .35 = $52.50 D($) • $150 – 52.50 = $97.50 (NP)

  23. Employee Discounts • Encourages workers to buy the products they sell or manufacture. • Employees who buy and use their company’s products project confidence in and enthusiasm about the products. • Discounts range from 10 percent to 30 percent for entry level employees • Can be from 50 percent and higher to top level executives

  24. Look at calculations of discounts • Page 493-495

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