Concepts of Marking Up - Economics Essay Example
A markup is an amount added to the price of a good above its cost of production and distribution - Concepts of Marking Up introduction. Markups must have the capability to suffice all foreseen expenses and reductions on the goods to be sold (Axarloglou, 2004). There are three methods to which price markups are determined. These are based on the product’s cost, selling price and its shelf life (for perishable goods).
On placing markups based on the product’s cost, the retailer primarily considers how much were his expenses in obtaining the product he is to sell, such as production and distribution costs. Markup prices from this method entail how much profit the retailer would receive on each item sold. This pricing also lays a uniform selling price on goods of the same kind. Supermarkets and grocery stores usually follow this method of pricing, for they offer the same identical products (of different brands) to the market.
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Markups based on selling price meanwhile rely on the reflection of prices both from other retailers as well as the response of the consumers. Retailers usually come up with lower markup prices despite using the same information from cost-based markups, but this method serves more as a promotional strategy in order to obtain patronage from consumers. Lower markup prices especially on goods that are high in demand indicate more consumption as compared to when these goods are priced only to earn profits from their production costs (Evans, 2002).
These two markup pricing methods are used depending on what kind of goods are to be sold in a season. Cost-based markups are used to lay uniformity in prices, while selling price markups mean competition. On the other hand, pricing perishable goods are based on a different reason. Above production costs and market competition, perishable goods have a shelf-life and thus become useless after they expire. Retailers therefore consider how many unsold units of the product would be left after its expiry date, and its markup should be able to cover this loss.
Axarloglou, Kostas (2004). Eastern Economic Journal, (30) 2, 223-235.
Evans, Joel R. (2002). Part 4: Planning for Shrink, Price Lining and Advertising. Pricing and Retailers: Questions to Consider, see http://www.retailindustry.about.com