Marketing Essentials

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Marketing Essentials
n Chapter 27 Pricing Math
Section 27.1 Calculating Prices
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SECTION 27.1
Calculating Prices
What You'll Learn

• How a firm's net profit or loss is related to
  pricing
• How to calculate dollar and percentage markup
  based on cost or retail
• How to calculate markdown in dollars, and how to
  determine sale price and maintained markup

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SECTION 27.1
Calculating Prices
Why It's Important
Now that you understand the principles of
pricing, it is time to learn how to calculate
prices. Wholesalers and retailers, as well as
manufacturers and service businesses, need to
perform mathematical calculations to determine
the prices they will charge their customers. You
learned earlier that pricing is related to a
company's profitability now you will learn how
they are related.
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SECTION 27.1
Calculating Prices
Key Terms

• gross profit
• maintained markup

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SECTION 27.1
Calculating Prices
Profit vs. Markup
A businesss profit is not the same as its
markup. Markup is the difference between the cost
of an item and the retail price. Profit is whats
left over after all other expenses have been paid.
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SECTION 27.1
Calculating Prices
Basic Markup Calculations

• Retailers and wholesalers use the same formulas
  to calculate markup. The most basic pricing
  formula is the one for calculating retail price
• Cost (C) markup (MU) retail price (RP)
• Two other formulas can be derived from this
  formula
• Retail price (RP) markup (MU) cost (C)
• Retail price (RP) cost (C) markup (MU)

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SECTION 27.1
Calculating Prices
Percentage Markup

• In most business situations, the markup figure is
  expressed as a percentage MU(), rather than a
  dollar figure MU().
• Most sellers compute markup based on retail price
  rather than cost because
• the markup on retail sounds smaller
• future markdowns are calculated on retail
• profits are calculated on sales revenue

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SECTION 27.1
Calculating Prices
Markup Equivalents Table
The markup equivalents table lists markup
percentages based on retail and the equivalent
percentages based on cost. To use the table, you
locate the percentage markup on retail and read
its markup on cost equivalent in the adjacent
column or vice versa. The table allows users to
quickly convert markups on retail to markups on
cost and vice versa.
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SECTION 27.1
Calculating Prices
Cost Method of Pricing

• Sometimes marketers know only the cost of an item
  and its markup on cost. In such a situation, they
  use the cost method of pricing
• Multiply the cost by the percentage markup on
  cost in decimal form
• C x MU() MU()
• Add the dollar markup to the cost to get the
  retail price
• C MU() RP

Slide 1 of 2
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SECTION 27.1
Calculating Prices
Cost Method of Pricing

• If you know the cost and the markup on retail,
  use the markup equivalents table to convert
  markup on retail to markup on cost, then
  calculate, using the cost method of pricing
• Multiply the cost by the percentage markup on
  cost in decimal form
• C x MU() MU()
• Add the dollar markup to the cost to get the
  retail price
• C MU() RP

Slide 2 of 2
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SECTION 27.1
Calculating Prices
Typical Markup Percentage
Markup percentages vary with the type of product
and business. How would you determine how much a
microwave, whose retail price was 159.99, cost
when all you knew was the markup percentage based
on cost noted in the above table? What would be
its cost in dollars?
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SECTION 27.1
Calculating Prices
Retail Method of Pricing

• If you know only the cost and markup on retail,
  you can use the retail method of pricing to
  compute the retail price.
• Determine what percentage of the retail price is
  the cost
• RP() - MU() C() (retail price would be 100)
• Determine the retail price by dividing the cost
  by the decimal equivalent of the cost percentage
• C() / C() RP
• Calculate the dollar markup
• RP - C MU()

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SECTION 27.1
Calculating Prices
The Retail Box
To compute retail price using the retail method,
fill in the boxes following the letter sequence
(J-O). Note that the box labeled J (RP) is
always 100. The amounts that go in the boxes
labeled K (MU) and O (C) are usually known. Why
is this retail box an example of the retail
method for calculating markup?


Retail Price M J Retail Price M J 100 11.25 10
0 Markup N K Markup N K 4.50 40 Cost O L
Cost O L 6.75 6.0
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SECTION 27.1
Calculating Prices
Calculations for Lowering Prices

• When a business lowers its prices, a new sale
  price must be calculated, as well as a new
  markup. To calculate a markdown, determine the
  markdown percentage on retail. Then
• Determine the dollar markdown by multiplying the
  retail price by the percentage markdown
• RP x MD() MD()
• Subtract the dollar markdown from the retail
  price to get the sale price
• RP - MD() SP

Slide 1 of 2
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SECTION 27.1
Calculating Prices
Calculations for Lowering Prices

• There is another, simpler way to calculate the
  sale price
• Subtract the markdown percentage from 100
  (representing retail price)
• RP() - MD() SP () (RP 100)
• Multiply the retail price by the decimal
  equivalent of the percentage sale price
• RP x SP() SP()

Slide 2 of 2
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SECTION 27.1
Calculating Prices
Maintained Markup

• When a marketer marks down goods, the markup and
  markup percentage change. The difference between
  an item's final sale price, and its cost is
  called the maintained markup.
• To determine the maintained markup
• Calculate the new sale price
• RP() - MD() SP ()
• RP x SP() SP() continued

Slide 1 of 2
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SECTION 27.1
Calculating Prices
Maintained Markup
continued

• Subtract the cost from the sale price to
  determine maintained markup (MM())
• SP - C MM()
• Divide the maintained markup in dollars by the
  sale price to determine the maintained
  percentage
• MM() / SP MM()

Slide 2 of 2
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ASSESSMENT
27.1
Reviewing Key Terms and Concepts
1. Explain how a firm's net profit or loss is
related to pricing. 2. How are the dollar and
percentage markups based on cost and based on
retail calculated? Illustrate the formulas for a
book that costs 13.99 and has a retail price is
19.99. 3. Assume that an item that cost 125 and
currently retails for 279.99 (RP) is going to be
marked down 40 percent for a special sale.
Calculate the new sale price, as well as the
maintained markup in dollars and as a percent.
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ASSESSMENT
27.1
Thinking Critically
If a buyer wanted to buy goods that cost 100 and
the customary markup on retail was 40 percent,
what two methods could the buyer use to calculate
the retail price? Explain.
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Marketing Essentials
End of Section 27.1