Common Price Setting Methods
The price you charge for goods and services you provide must be sufficient to cover all expenses and allow for the desired profit to be made. A number of price setting methods are available. The particular method used by business will depend, in part, on the type of business being operated.
Mark-up on cost
Some businesses, particularly retail businesses, apply a set mark-up to the cost of an item to determine their selling price.
A ladies fashion retailer may apply a mark-up of a 100% on all dresses 50% of all jumpers. Therefore, if the seller pays at cost price of $ 80.00 for a dress, the selling price will be:
$ 80.00 + ($ 80.00 x 100%) = $ 160.00 (mark-up 100%)
If the retailer pays the cost price of $ 50.00 for a jumper, the selling price will be:
$ 50.00 + ($ 50.00 x 50%) = $ 75.00 (mark-up 50%)
If you use mark-up on cost as the basis for determining your prices, you need to be flexible in applying the mark-up. There are two reasons for this. Firstly, blindly applying the same mark-up indiscriminitely to a range of products can cause a business to have similar products priced at similar but different prices, which can compel the buying decisions of customers.
For example, applying a constant mark-up may mean that a shoe retailer may have shoes priced at: $ 45.00, $ 47.50, $ 49.50, $ 48.00, $ 49.95 and $ 50.00. This makes the buying decision harder for the purchaser. If all these shoes were priced at say $ 47.50, the buying decision becomes much easier.
Secondly, applying a constant mark up without consideration may lead to poor stocking decisions. For example, the ladies fashion retailer may apply a mark-up of 100% to all dresses. The retailer may have the option of buying two different dresses, dress A and dress B, for $ 100.00 each. By applying a constant mark-up of 100% the retailer would price both dresses at $ 200.00. She may believe she can sell a limited number of dress A at this price and therefore stock dress A. On the other hand, she may believe that she could not sell dress B at this price, and then decide not to stock the item. However, by applying a mark-up of 80% to this item instead of 100%, the retailer may have been able to sell three times as many dress B's as dress A's. But by using the 100% mark up religiously, and in using the price so obtained in reaching stocking decisions, the retailer has forgone this opportunity.
Mark-up on cost can be a good guide for setting prices and is often used by retailers. However, it needs to be used as a guide only and used with flexibility. The mark-up used will vary from industry to industry and according to the type of goods being sold. The mark-up needs to be sufficient to cover all costs and provide the desired level of profit for the business.