Markup is a strategy that you can use to increase price competition with similar competitors. By implementing the right markup strategy, your business will certainly be an option for buyers. In the industrial world, setting a competitive selling price is crucial. Mismanagement of mark up or markdown will lead to more serious things.
Such as pricing that is too high or even too low. Distorted prices can result in sales declining dramatically, possibly even leading to an absence of profits. Therefore, you can use marketing automation software to find out what prices are still reasonable to markup. For that, make sure you learn more understanding so that your business can get maximum profits.
Table of Content
Definition of Markup
Mark-up is an increase in the price that has been added to the cost of a product to determine the selling price of the product. In short, the markup is to raise the price of goods. Mark up shows how much the selling price of a product is compared to its production price.
Basically, the higher the markup value, the greater the revenue the company generates. The calculation of markup is from the retail price of a product minus its production price.
Formula:
Selling Price = Cost of Buying Products + Markup
Markup values are also displayed in percentage form. Here’s a formula for calculating markups:
A simple example, when the product costs Rp20,000 you sell at a price of Rp30,000. The percentage mark up is (30,000-20,000)/20,000 = 0.5 x 100 = 50%. Understand the case examples below.
Examples of applying mark-ups
Besari is the owner of XYZ, a technology company that sells software. Today Besari has an order from ABC company for Accounting Software for Rp4,000,000 and HRM Software for Rp6,000,000. In addition, some installations must be done so that the software is integrated with each computer ABC company.
Installation cost amounting to Rp10,000,000. If Besari wants a profit of 25% for the order, what price should Besari charge for ABC company?
Step #1: Calculate the total cost of the order (accounting software + HRM software + installation cost)
Rp4,000,000 + Rp6,000,000 + Rp10,000,000 = Rp20,000,000 (total cost).
Step #2: Determine the selling price by a percentage of 25%
25% = (Selling price – Rp20,000,000) / Rp20,000,000 x 100. Then the price that Besari sells (selling price) to ABC company is Rp25,000,000 to achieve the mark up that Besari wants.
Also Read: What is the Cost of Revenue and How to Calculate it?
Definition of Markdown
If you see retail goods in a store, there is a discount/warehouse wash. For example, at the end of the year, the company uses the reason to markdown. In contrast to the definition of mark up, the understanding of markdown is the effort that the seller makes in lowering the selling price.
Markdown cannot be considered as the cause of the retailer’s loss. But reduce the profit to just a little. Therefore, these profits are not in line with what the company has expected.
In addition, the mention of markdown is also discrimination of the second tier price. Because it is retail has charged a fee.
The price that the company expects is undoubtedly different from the offer to consumers when doing markdown. The cause of this is due to the occurrence of bargaining activities by consumers.
Formula:
Selling Price = Cost of Buying Products – Markdown
Examples of applying markdown
Ronaldo is a reseller of Nike HM01 edition football boots. Ronaldo wants to do a warehouse wash at the end of the year, so apply the markdown.
Before making markdown, shoe sales used to mark up 60%, after using the markdown concept to 20%, the selling price of Nike HM01 shoes dropped from the previous Rp320,000, which came from Rp200,000 (the cost of buying products) + Rp120,000 (mark up). Then the selling price becomes Rp240,000 which comes from Rp200,000 (the cost of buying products) + Rp40,000 (markdown).
Examples of Pricing other than Markup
In addition to setting a selling price through the methods we mentioned earlier, several other ways are divided into three kinds of approaches. Here’s the full explanation.
Pricing based on cost
There are three parts of using this method, cost-plus pricing, calculation of Cost of Goods Sold (COGS), and Break-Even Point (BEP) pricing. Here’s the explanation:
- Cost-plus pricing
To determine the selling price with this method, calculate the entire cost per unit plus a certain amount to cover the profit you have set on the team (margin). To better understand, the formulation is as follows:
Selling Price = Total Cost + Margin
- Cost of Goods Sold (COGS)
The COGS method generates a selling price per unit by calculating the Cost of Purchase (COGS) per unit plus (mark up) a certain amount. The formula is:
Selling Price = Purchase Price + Mark Up
- Break-Even Point (BEP)
BEP (Break-Even Point) is pricing based on calculations between the total amount of overall costs minus the total receipts. The formula is:
Selling Price = Total Cost – Total Receipts
Pricing based on the price of a competitor or competitor
This method of pricing uses the price of competitors or competitors as a benchmark. It usually occurs in oligopoly markets.
For example, in the world of technology, Samsung or Apple products are market leaders. In short, the market leader in the company has mastered the market segment for each product line.
Samsung and Apple can easily shape products in new market lines because people already know the brand. For example, the iPhone 13 or Samsung Galaxy S21 Ultra 5G at a price that no other brand has ever sold before.
Unlike Huawei, Xiaomi, Oppo, Vivo, and others. To compete in the market, companies must price their products like Samsung or Apple for each similar product.
Pricing on demand
The method for setting prices on demand is the basic theory of economics. It relates to the law of demand and the rule of supply.
The law of demand explains that when a goods or service price falls, demand will rise. Conversely, when the cost of the requested goods rises, then the demand will fall.
The law of supply is contrary to the law of demand. The law of demand means that when the price of goods increases will encourage an increase in the supply of a good or service.
If a good or service increases in price, then production will supply more goods. Conversely, when prices fall, sellers reduce supply.
In determining the price, you should first measure the proper market equilibrium so that the product you produce is not excessive or deficient. The price listed is relatively stable.
Conclusion
By understanding this article as a whole, you should be able to set a price well. Deviations that go too far can make your product too expensive or too cheap, which has a loss for the business.
Markdown pricing and markups are crucial. The option to raise or lower the price you can learn according to good calculations. In addition, you can set prices in other ways, such as plus cost pricing, COGS, or BEP.
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