Comparison of Markup Methods

So why do some resellers use Markup-on-Cost while others use Markup-on-Selling-Price? The answer to this lies more with promotion than with pricing. In particular, Markup-on-Selling-Price is believed to aid promotion, especially for resellers who market themselves as low-price leaders. This is because the amount of money a reseller makes in percentage terms is always lower when calculated using Markup-on-Selling-Price than it is with Markup-on-Cost.

For example, in the Markup-on-Cost example where the markup is 30%, the gross profit is $15 ($65-$50). If the reseller using Markup-on-Selling-Price received a gross profit of $15 its markup would only be 23 percent ($50/[1.00-.23] = $65). Consequently, a retailer’s advertisement may say: “We Make Little, But Our Customers Save a Lot” and back this up by saying they only make a small percentage on each sale. When in reality, how much they make in monetary terms may be equal to another retailer who uses Markup-on-Cost and reports a higher markup percentage.