How to calculate the markup on the product? This is a question that entrepreneurs usually ask. This is not just idle curiosity, but real practical interest. In this way, it is possible to establish an adequate cost for our own products, as well as to find out approximate purchase prices of competitors.
Definition
Before proceeding to mathematical calculations, you need to understand the terms. So, the percentage markup on goods is the size of the premium to the cost of goods, after adding which the final price for the consumer is formed.
If the allowance is correctly calculated, the entrepreneur will be able not only to cover his own expenses associated with the organization of the business, but also to profit from his own activities. As a rule, the margin is expressed as a percentage calculated from the cost of a product.
What affects the markup size?
If there are several factors on which the percentage of the premium depends.
- Product features, consumer qualities, level of demand and competitiveness of the manufacturer under whose brand a product is produced.
- Costs of organizing sales. Entrepreneurs usually include storage costs, logistics, staff payments, etc.
- Tax amount. In the amount of each product will certainly lay value added tax. For each category of goods, it may differ. However, in any case, the VAT rate affects the final cost of the product.
Approximate margins
Being interested in how to calculate the percentage of the premium, you need to understand that the final cost must certainly be competitive. If another seller has an identical product will be cheaper, it is likely that you will not be able to attract buyers. That is why most entrepreneurs strive to minimize costs that directly affect the final cost.
The average mark-up on a retail product varies by category. The following are averages:
- Clothes and shoes. From forty to one hundred percent.
- Souvenirs and jewelry. More than one hundred percent.
- Various accessories. More than one hundred percent.
- Automotive products. Thirty to fifty percent.
- Stationery. Twenty-five to sixty-five percent.
- Cosmetics. Twenty-five to seventy-five percent.
Now you know how much percent of margins in retail trade it is customary to establish depending on the category of goods sold by the seller.
Price calculation by example
So, suppose that you are calculating the final cost of the goods. To do this, the cost of your product must be multiplied by the percentage markup. Thus, it will be possible to find out the additional amount. Now it remains to add it to the purchase price, and thus you will know the final cost of the product sold.
If you purchase a unit of goods from a supplier for fifty rubles, and the mark-up is forty percent, then a mark-up will have to be added to the initial price. In our example, in monetary terms, it is twenty rubles. That is, the final cost of the product for a potential consumer will be seventy rubles.
How to calculate the markup on the product?
If you know the purchase and final cost of the product, it is easy to calculate the percentage of the premium.
To do this, you just need to take a few simple steps:
- First, the final cost of a unit of goods must be divided into the purchase.
- Subtract one from the result.
So, if one product is sold at a price of forty conventional units, and the purchase price is twenty-five conventional units, in accordance with the above scheme, it is easy to calculate the mark-up size. In this case, it is sixty percent.
However, in most cases, the question of how to calculate the markup on a product is relevant when the final cost is still unknown. In this case, the calculation is made in a slightly different way.
Calculation formula
To avoid all kinds of mistakes, most entrepreneurs use a simple formula that allows you to calculate the trade margin:
TH = ST *% TH
ST - the cost of goods
% - percentage of assigned trade margin
TN - the size of the trade margin in cash.
As you understand, to use this formula for calculating the percentage of mark-up on a product, you need to know the percentage of the established premium. We will tell about how to do this below.
How to set a margin?
So, to determine the size of the premium, which will increase the purchase value, potential sellers usually take into account a number of factors:
- Initial costs.
- Threshold cost.
- Sales segment.
- Elasticity of demand.
- Availability of additional services.
- Buyers interests.
- The presence of competitors in the selected segment.
Now you know how to make a markup on a product as a percentage. However, the points listed above need some explanation.
Initial cost
Correctly calculate the percentage of allowance will allow the mandatory accounting of all costs. This category includes not only the purchase value of the goods, but also the associated costs. For example, the delivery of goods from the manufacturer to the final buyer. If we are talking about our own production, additional costs still can not be avoided. As costs, it is necessary to take into account the costs of equipment, staff remuneration, etc. Only after determining the initial costs can we turn to the question of how to calculate the markup on the product.
Threshold cost
So in the economy they call the minimum price, at the establishment of which the seller will not incur financial losses, but also will not receive profit. The threshold value must certainly cover all costs not only for the purchase of goods, but also for its storage, as well as transportation. Some entrepreneurs make a mistake, focusing solely on competitors and neglecting the calculation of the threshold value. Such neglect of one's own business can result in monetary losses.
Sales segment
The percentage of the trade margin depends not only on costs and demand for the goods, but also on the business segment. It is curious that for different categories of goods in the market it is customary to establish different margins. In addition, there are categories of goods that are in high demand in certain seasons, which allows potential sellers to increase prices, while increasing the percentage of premiums.
Demand elasticity
This is a special economic indicator that allows you to find out how much a decrease or increase in price affects the level of consumer demand. If the product has elastic demand, it begins to sell well when discounts are set. If the demand is inelastic, the availability of the discount does not in any way affect the sales of the product. That is why, even before discounts are established with elastic demand, it is necessary to lay in the price a further opportunity to provide discounts.
Availability of additional services
Some sellers offer additional free services to their customers for marketing purposes. A similar approach often works, increasing demand for the main product. It is worth noting that the organization of the provision of additional free services, as a rule, does not imply any costs for the seller. For example, such a service may be installment payment for several months, which is important when selling expensive goods. Such offers attract potential customers, which will allow the seller to increase the size of the trade margin.
Buyers Interests
Establishing a trade margin, you need to understand that the final cost of the goods, which will result from the calculations, should be acceptable to potential buyers.
The acceptable price depends on many factors:
- Type of goods.
- The location and, accordingly, the permeability of the outlet.
- The presence of competitors in your industry, etc.
When it comes to medium-sized business, deviations from the price set by competitors, as a rule, do not exceed twenty-five percent up or down. Only large retail outlets can afford more serious deviations from the average market indicators established by the market.
Competitors
The size of the price premium directly affects the final cost of the product, so it is highly dependent on the presence of competitors. That is why this factor cannot be ignored. First you need to study not only customer demand, but also the offers of your competitors. This will allow you to build a profitable sales scheme and ultimately build a successful business.
Now you know the features of calculating markups on goods.