About Price Markups

Price markups are a fact of life in the retail industry. Companies are not in the business of producing products to lose money. At the same time, a company needs to beware of their customers starting to feel that the company is taking advantage of them and increasing prices too much. This balance is the challenge that many companies face when determining their price markup percentage.

Significance

The price markup is the amount that a business is looking to make on the sale of the item they are selling above the cost of producing the product itself. Some companies use cost accounting, which means all overhead costs are including in the cost of production of a product. The markup percentage on a product produced by a company that uses cost accounting will be a relatively low percentage. In comparison, a product produced by a company that doesn't use cost accounting will most likely have a higher markup percentage, but could have a lower price than the other company's product because overhead costs aren't included.

Types

Price markups quite often depend on the type of business that is assessing them onto their products. Service industries have some of the highest price markups on their services when compared with the cost of the service. Industries with a lot of competition in a local area tend to have the lowest price markups as customers will be turned off if one company's products are much more expensive than their competition.

Effects

The effects of price markups can be both positive and negative. High price markups can increase the profitability of the company significantly. Raising the markup too high, though, can result in a company selling fewer products in a highly competitive market and actually hurting its profitability. A company with little competition or one that specializes in certain market sectors will see the least significant negative reaction due to increased markup percentages. This is why niche marketers can have very high price markups and still maintain high sales volumes.

Benefits

Analyzing the marketplace smartly can allow a company to use price markups in an extremely effective manner. It must analyze the competition in the marketplace when deciding on its price markup strategy. Increasing the price markup will quickly increase profits for a company, as long as its sales volume does not drop significantly as a result of its markups. Companies need to experiment with their price markup percentage and their sales volume by tracking it on a regular basis and finding the ultimate price markup percentage.

Warning

When the public finds out the price markup percentage a certain company is using in the marketplace, there can be a significant negative reaction. This is especially true if the public views your price as being the highest in the marketplace for a product and a report is issued indicating your company is using the highest price markup percentage. Due to this reaction, the percentage markup that your company uses should be a well guarded secret. Only the people in your company that need to know should know the actual percentage. If too many people know, the risk of the information leaking out increases.