How to calculate the markup on a product: calculation formula. What percentage is the retail markup?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

How to calculate the markup on a product? This is a question entrepreneurs usually ask. This is not just idle curiosity, but real practical interest. In this way, it is possible to establish an adequate cost for our own products, as well as to find out the approximate purchase prices of competitors.

Definition

Before proceeding with mathematical calculations, you need to understand the terms. So, the percentage of markup on goods is the amount of the markup on the cost of the goods, after which the final price for the consumer is formed.

If you correctly calculate the allowance, the entrepreneur will be able not only to cover his own expenses associated with organizing a business, but also to profit from his own activities. As a rule, the margin is expressed as a percentage calculated from the cost of a particular product.

What influences the markup?

If there are several factors on which the percentage of the premium depends.

• Featuresgoods, consumer qualities, the level of demand and competitiveness of the manufacturer, under whose brand this or that product is produced.
• Expenses for sales organization. Entrepreneurs usually include storage costs, logistics, staff payments, etc.
• Amount of tax. Value added tax is included in the amount of each product. It may differ for each product category. However, in any case, the VAT rate affects the final cost of the product.

Approximate margins

When wondering how to calculate the percentage of the premium, you need to understand that the final cost must certainly be competitive. If another seller has an identical product for less, there is a high probability that you will not be able to attract buyers. That is why most entrepreneurs strive to minimize costs that directly affect the final cost.

The average retail markup varies by category. Below are the averages:

• Clothes and shoes. Forty to one hundred percent.
• Souvenirs and bijouterie. Over one hundred percent.
• Various accessories. Over one hundred percent.
• Automotive products. Thirty to fifty percent.
• Stationery. Twenty-five to sixty-five percent.
• Cosmetics. Twenty-five to seventy-five percent.

Now you know what percentage of markups in retail trade it is customary to set depending oncategories of goods sold by the seller.

Price calculation by example

So, let's say you calculate the final cost of a product. To do this, the cost of your product must be multiplied by the markup percentage. In this way, it will be possible to find out the additional amount. Now it remains to add it to the purchase price, and thus you will find out the final cost of the product being sold.

If you buy a unit of goods from a supplier for fifty rubles, and the markup is forty percent, then you will need to add a markup to the original price. In our example, in monetary terms, it is twenty rubles. That is, the final cost of the product for a potential consumer will be seventy rubles.

How to calculate the markup on a product?

If you know the purchase and final cost of the product, it is not difficult to calculate the markup percentage.

To do this, you just need to take a few simple steps:

• First, the final cost of a unit of goods must be divided by the purchase price.
• Subtract one from the result.

So, if one product is sold at a price of forty conventional units, and the purchase price is twenty-five conventional units, in accordance with the above scheme, it is easy to calculate the size of the margin. In this case, it is sixty percent.

However, in most cases, the question of how to calculate the markup on a product is relevant when the final cost is still unknown. In this case, the calculusproduced in a slightly different way.

Calculation formula

To avoid all kinds of mistakes, most entrepreneurs use a simple formula to calculate the sales margin:

TN=ST% TN

CT - cost of goods

% TN - percentage of the assigned trade margin

TN - the amount of the trade margin in monetary terms.

As you understand, to use this formula for calculating the percentage of markup on a product, you need to know the percentage of the established markup. We will tell you how to do this below.

How to set markup?

So, potential sellers usually consider a number of factors to determine the amount of the premium by which the purchase price will be increased:

• Initial cost.
• Threshold cost.
• Sales segment.
• Elasticity of demand.
• Availability of additional services.
• Customer interests.
• Presence of competitors in the selected segment.

Now you know how to mark up a product as a percentage. However, the above points need some clarification.

Initial Costs

Correctly calculate the percentage of the allowance will allow the mandatory accounting of all costs. This category includes not only the purchase price of the goods, but also the associated costs. For example, for the delivery of goods from the manufacturer to the final buyer. If we are talking about our own production, additional costs still cannot be avoided. Ascosts, you need to take into account the costs of equipment, salaries of employees, etc. Only after determining the initial costs, you can proceed to the question of how to calculate the markup on the goods.

Threshold cost

So in the economy they call the minimum price, at which the seller will not incur financial losses, but will not receive profit either. The threshold cost must certainly cover all costs not only for the purchase of goods, but also for its storage, as well as transportation. Some entrepreneurs make the mistake of focusing solely on competitors and neglecting the threshold cost calculation. Such neglect of one's own business can result in monetary losses.

Sales segment

The percentage of the trade margin depends not only on the costs and demand for the goods, but also on the business segment. It is curious that for different categories of goods on the market it is customary to set different margins. In addition, there are categories of goods that are in high demand during certain seasons, which allows potential sellers to increase their prices while increasing the markup percentage.

Elasticity of demand

This is a special economic indicator that allows you to find out how much a decrease or increase in price affects the level of consumer demand. If a product has an elastic demand, it starts to sell well when discounts are set. If demand is inelastic, the presence of a discount does not affect the sale of the product in any way. That's why elsebefore establishing discounts with elastic demand, it is necessary to include in the price the further possibility of providing discounts.

Availability of additional services

Some merchants offer additional free services to their customers for marketing purposes. This approach often works by increasing the demand for the main product. It should be noted that the organization of the provision of additional free services, as a rule, does not imply any costs for the seller. For example, such a service can be payment by installments for several months, which is important when selling expensive goods. Such offers attract potential customers, which will allow the seller to increase the sales margin.

Customer interests

When setting the trade margin, you need to understand that the final cost of the goods, which will be the result of the calculations, must be acceptable to potential buyers.

Acceptable price depends on many factors:

• Product type.
• Location and, accordingly, the patency of the outlet.
• The presence of competitors in your industry, etc.

When it comes to medium-sized businesses, deviations from the price set by competitors, as a rule, do not exceed twenty-five percent up or down. Only large outlets can afford larger deviations from market averages set by the market.

Presence of competitors

Size of pricemarkups directly affect the final cost of the product, so it is highly dependent on the presence of competitors. That is why this factor cannot be ignored. First you need to study not only consumer demand, but also the offers of your competitors. This will allow you to build a profitable sales scheme and ultimately build a successful business.

Now you know the features of calculating the markup on goods.