1 / 20

Marketing Essentials

Marketing Essentials. n Chapter 27 Pricing Math. Section 27.1 Calculating Prices. SECTION 27.1. Calculating Prices. What You'll Learn. How a firm's net profit or loss is related to pricing How to calculate dollar and percentage markup based on cost or retail

arden-foley
Download Presentation

Marketing Essentials

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Marketing Essentials nChapter 27 Pricing Math Section 27.1 Calculating Prices

  2. SECTION 27.1 Calculating Prices What You'll Learn • How a firm's net profit or loss is related to pricing • How to calculate dollar and percentage markup based on cost or retail • How to calculate markdown in dollars, and how to determine sale price and maintained markup

  3. SECTION 27.1 Calculating Prices Why It's Important • Now that you understand the principles of pricing, it is time to learn how to calculate prices. Wholesalers and retailers, as well as manufacturers and service businesses, need to perform mathematical calculations to determine the prices they will charge their customers. • You learned earlier that pricing is related to a company's profitability; now you will learn how they are related.

  4. SECTION 27.1 Calculating Prices Key Terms • gross profit • maintained markup

  5. SECTION 27.1 Calculating Prices Profit vs. Markup A business’s profit is not the same as its markup. Markup is the difference between the cost of an item and the retail price. Profit is what’s left over after all other expenses have been paid.

  6. SECTION 27.1 Calculating Prices Basic Markup Calculations • Retailers and wholesalers use the same formulas to calculate markup. The most basic pricing formula is the one for calculating retail price: • Cost (C) + markup (MU) = retail price (RP) • Two other formulas can be derived from this formula: • Retail price (RP) – markup (MU) = cost (C) • Retail price (RP) – cost (C) = markup (MU)

  7. SECTION 27.1 Calculating Prices Percentage Markup • In most business situations, the markup figure is expressed as a percentage MU(%), rather than a dollar figure MU($). • Most sellers compute markup based on retail price rather than cost because: • the markup on retail sounds smaller • future markdowns are calculated on retail • profits are calculated on sales revenue

  8. SECTION 27.1 Calculating Prices Markup Equivalents Table The markup equivalents table lists markup percentages based on retail and the equivalent percentages based on cost. To use the table, you locate the percentage markup on retail and read its markup on cost equivalent in the adjacent column or vice versa. The table allows users to quickly convert markups on retail to markups on cost and vice versa.

  9. SECTION 27.1 Calculating Prices Cost Method of Pricing • Sometimes marketers know only the cost of an item and its markup on cost. In such a situation, they use the cost method of pricing: • Multiply the cost by the percentage markup on cost in decimal form: C x MU(%) = MU($) • Add the dollar markup to the cost to get the retail price: • C + MU($) = RP Slide 1 of 2

  10. SECTION 27.1 Calculating Prices Cost Method of Pricing • If you know the cost and the markup on retail, use the markup equivalents table to convert markup on retail to markup on cost, then calculate, using the cost method of pricing: • Multiply the cost by the percentage markup on cost in decimal form: C x MU(%) = MU($) • Add the dollar markup to the cost to get the retail price: • C + MU($) = RP Slide 2 of 2

  11. Product Category Typical Markup Percentage Based on Cost 30% Small Appliances (microwave, coffee maker) 15%-20% Large Appliances (refrigerator, dryer) 5-10%* (*note dealers make money on factor incentives and sale of accessories) Automobiles 15-20% Automobile Accessories (sunroof, CD player) 100% Clothing SECTION 27.1 Calculating Prices Typical Markup Percentage Markup percentages vary with the type of product and business. How would you determine how much a microwave, whose retail price was $159.99, cost when all you knew was the markup percentage based on cost noted in the above table? What would be its cost in dollars?

  12. SECTION 27.1 Calculating Prices Retail Method of Pricing • If you know only the cost and markup on retail, you can use the retail method of pricing to compute the retail price. • Determine what percentage of the retail price is the cost: RP(%) - MU(%) = C(%) (retail price would be 100%) • Determine the retail price by dividing the cost by the decimal equivalent of the cost percentage: C($) / C(%) = RP • Calculate the dollar markup: • RP - C = MU($)

  13. SECTION 27.1 Calculating Prices The Retail Box To compute retail price using the retail method, fill in the boxes following the letter sequence (J-O). Note that the box labeled “J” (RP%) is always 100%. The amounts that go in the boxes labeled K (MU%) and O (C$) are usually known. Why is this retail box an example of the retail method for calculating markup? $ % $ % Retail Price M J Retail Price M J 100 11.25 100 Markup N K Markup N K 4.50 40 Cost O L Cost O L 6.75 6.0

  14. SECTION 27.1 Calculating Prices Calculations for Lowering Prices • When a business lowers its prices, a new sale price must be calculated, as well as a new markup. To calculate a markdown, determine the markdown percentage on retail. Then: • Determine the dollar markdown by multiplying the retail price by the percentage markdown: RP x MD(%) = MD($) • Subtract the dollar markdown from the retail price to get the sale price: • RP - MD($) = SP Slide 1 of 2

  15. SECTION 27.1 Calculating Prices Calculations for Lowering Prices • There is another, simpler way to calculate the sale price: • Subtract the markdown percentage from 100% (representing retail price): RP(%) - MD(%) = SP (%) (RP = 100%) • Multiply the retail price by the decimal equivalent of the percentage sale price: • RP x SP(%) = SP($) Slide 2 of 2

  16. SECTION 27.1 Calculating Prices 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. • To determine the maintained markup: • Calculate the new sale price: • RP(%) - MD(%) = SP (%) • RP x SP(%) = SP($) continued Slide 1 of 2

  17. SECTION 27.1 Calculating Prices Maintained Markup continued • Subtract the cost from the sale price to determine maintained markup (MM($)): SP - C = MM($) • Divide the maintained markup in dollars by the sale price to determine the maintained percentage: • MM($) / SP = MM(%) Slide 2 of 2

  18. ASSESSMENT 27.1 Reviewing Key Terms and Concepts • 1. Explain how a firm's net profit or loss is related to pricing. • 2. How are the dollar and percentage markups based on cost and based on retail calculated? Illustrate the formulas for a book that costs $13.99 and has a retail price is $19.99. • 3. Assume that an item that cost $125 and currently retails for $279.99 (RP) is going to be marked down 40 percent for a special sale. Calculate the new sale price, as well as the maintained markup in dollars and as a percent.

  19. ASSESSMENT 27.1 Thinking Critically • If a buyer wanted to buy goods that cost $100 and the customary markup on retail was 40 percent, what two methods could the buyer use to calculate the retail price? Explain.

  20. Marketing Essentials End of Section 27.1

More Related