Cost Pricing: Markup Method
This pricing method, often utilized by resellers who acquire products from suppliers, uses a percentage increase on top of product cost to arrive at an initial price. A major general retailer, such as Walmart, may apply a set percentage for each product category (e.g., womens' clothing, automotive, garden supplies, etc.) making the pricing consistent for all like-products. Alternatively, the predetermined percentage may be a number that is identified with the marketing objectives (e.g., required 20% ROI).
For resellers that purchase thousands of products (e.g., retailers) the simplicity inherent in markup pricing makes it a more attractive pricing option than more time-consuming methods. However, the advantage of ease of use is sometimes offset by the disadvantage that products may not always be optimally priced resulting in products that are priced too high or too low given the demand for the product.
Resellers differ in how they use markup pricing with some using the Markup-on-Cost method and others using the Markup-on-Selling-Price method. In the next two sections we cover each option. We will demonstrate each using an item that costs a reseller (US) $50 to purchase from a supplier and sells to customers for (US) $65.