There are two main philosophies on how to calculate the sales price of your product or service: market and markup. Market pricing bases your price on what your competitors are charging which also equates to what the market will bear. For example, if most of your competitors are charging customers $1.25 per lightbulb, it will be difficult for you to charge $3.00. The "going rate" would therefore be $1.25. Markup pricing takes the cost of producing the product or service (the "cost of goods") and adds a fixed percentage on to come up with the sales price. This method gives you a fixed profit percentage and is commonly used in retail pricing. Calculating markup on the cost of goods is fairly straightforward.
Calculating Markup on Cost of Goods
Gather together information on your costs of producing your product or service. If you purchase your product wholesale to resell, this is simply your purchase cost of the item. If you manufacture a product, your direct costs will include materials, labor, supplies, and the overhead costs of the manufacturing facility. If you provide a service, your direct costs will include labor and supplies.
Choose an acceptable profit level that you wish to achieve. For example, you may decide that a gross profit percentage of 45% allows you enough profit to pay the other operating expenses of the company and provide you with an acceptable return on your investment as the owner of the company.
Apply your selected gross profit percentage to your cost of goods. This is your markup. For example, if you purchase women's blouses at fifteen dollars each to resell and you want a 45 percent profit, you would sell the blouses at a 45 percent markup or 15.00 multiplied by 1.45 equals $21.75. The difference between the sales price (21.75) and the cost (15.00) is $6.75 which is the profit. This gives you a 45 percent markup.
Pricing your product or service using markup without any consideration of consumer trends or average industry prices can leave you at a competitive disadvantage. You may be charging too little or too much and many lose business because of it.