Definition of Mark Up in Product Pricing

By | January 6, 2022

In the business world, it is not uncommon to know the notion of Mark Up. Both in the business world as a distributor, producer , or consumer or user of goods.

In addition, the issue of price is also very well known in the business world because it is considered an exchange rate commensurate with the product . In other words, this price issue should not be determined carelessly without considering the things in the business. However, it must be in accordance with the goods and services offered in a company.

In addition, pricing also requires consideration of certain factors in the development of a product or service, so that pricing is an important activity in every business.

Definition of mark up

Mark up  refers to the difference between the selling price of a good or service and its cost . It is expressed as a percentage above cost. In other words, it is the additional price above the total cost of the goods or services that gives the seller a profit.

Or:

Mark up refers to the value that the seller adds to the cost of the product. This added value is called mark-up. The mark-up added to the cost of goods is usually the same as the retail price.

Percentage markup formula

The formula for calculating the markup percentage can be expressed as:

percentage mark up = (selling price – price per unit) / price per unit x 100

Example

Budi is the owner of a company that specializes in manufacturing office computers and printers. He recently received a large order from a company for 30 computers and 5 printers. In addition, the client company commissioned Budi to install the software onto each computer.

The cost per computer is IDR 5,000,000 and the cost per printer is IDR 1,000,000. The cost of installing the software to run on all computers is IDR 200,000. If John wants to make a 20% profit on the order, how much should he charge?

Step 1: Calculate the total cost of the order (computer + printer + software installation). 5,000,000 x 30 + 1,000,000 x 5 + 200,000 = 155,200,000 (total cost).

Step 2: Determine the selling price using the desired 20% percentage.

20% x 155,200,000 (Total Cost) = IDR 31,040,000

= IDR 155,200,000 + 31,040,000

IDR 186,240,000 (selling price).

Therefore, in order for Budi to achieve the desired percentage of the desired markup of 20%, John must earn the company IDR 186,240,000.

Some of the methods used in pricing

As has been said before that pricing in the business world has many ways and mark up is one of them. But before using the right pricing method, of course, you have to consider several factors.

Here are some pricing methods you can choose from for your business:

1. Based on competitor’s price

Next is to set prices based on the prices offered by competitors. Where the price is used as a reference before determining the price of an item being sold. However, this pricing method is used for standard goods and in oligopoly market conditions.

In addition, every company before offering a product must use a sales strategy. With the aim that customers can be interested in using the products offered. Not only to attract customers, sales strategy can also be used as a strategy for competitors. Such as providing low prices first and prices below market prices.

2. On request

Pricing can also be done at the request of the customer or consumer. Because not all consumers can accept the price of an item that has been set in advance. Why is that ? Because customers usually think the price offered is too expensive or not in accordance with the quality of the goods.

Therefore, a producer must be smart in determining the price according to the quality of the goods. So that manufacturers can use an analysis called Price Sensitivity Meter. Because in this analysis, a consumer will be asked to provide a statement. Like the price is too cheap, the price is cheap, the taste is expensive, and also too expensive.

3. Cost based method

Pricing method In addition to using mark up is to use a method based on costs or cost calculations. There are three parts to using this method, namely costing plus, based on HPP calculations , and BEP pricing. The first is pricing using the cost plus method.

In this method, the total cost will be calculated plus a certain amount. The second uses the calculation of the purchase cost for one item and will be added with a mark up. The last method is to use the Break Even Point (BEP) method which is calculated with the total cost and overall revenue.

Tips Before Applying Mark Up in Business

As has been said before that before determining the price in any business must consider several factors. Because many consider mark ups as activities carried out with the aim of increasing profits. Therefore, here are some tips before applying mark up.

1. Pay attention to sales targets and development targets

The first tip is to pay attention to the sales target which is one of the important things and becomes a reference. Because you can tell how long the item is in the store. In addition, development targets also need to be considered so that the business that is run can run well and profitably.

2. Pay attention to operational costs

Various types of retailers do require operational costs. Where operational costs can be seen in the costs of transportation, communication and packaging. This needs to be considered before determining the price of an item. So that later there will be no loss.

Conclusion

Those are some explanations about the meaning of Mark Up and some strategies for making prices that can be used as reading references and knowledge in building your business.

Having trouble calculating the costs you incur in business and determining the right price for your service or product? Use correct accounting so that all costs and revenues can be properly monitored when the data is real.