Mark-up pricing is also known as cost pricing. It is a common and simple way of reaching a sale price. You simply take all your costs, choose a mark-up percentage and do the maths:
cost + (cost X mark-up %) = sale price
For example, if your total costs are R100 and you wish to apply a mark-up of 75%, then your sale price will be:
R100 + (100 X 0.75) = R175
Things to consider:
Production costs – this is mainly your raw materials e.g. if yours is a sandwich-making business, then the bread, butter, cheese, salad, cold meats and mayonnaise are the raw materials needed to make a basic sandwich. It follows then that you will need to calculate the actual cost of every type of sandwich you offer, to markup accurately. The humble cheese & tomato on brown bread may cost R8 to make in terms of raw materials, but a chicken mayo on rye, with all the trimmings, may cost R12.
Overhead costs – the cost to you of actually running the business. They may include the following items: rent, electricity, water, wages, marketing, professional fees (accountant fees say, or a permit), inbound shipping of raw materials, packaging, shop décor, website maintenance, etc. Once you have added up all these costs you will need to estimate how many sandwiches you will sell in a month and then allocate the costs to the sandwiches.
For example; your overhead costs come to R3,500 in total and you estimate you will sell 150 sandwiches per day, six days a week, which is a total of 3 600 sandwiches. If you divide R3,500 by 3600 sandwiches, then you need to add R0,97 to the cost of each sandwich, to determine the true cost. Your cheese & tomato now has a total cost of R8,97, while your chicken mayo costs R12,97.
If you apply a 75% markup, the cheese & tomato sandwich will sell for R15,69 while the chicken mayo will retail at R22,69.
You may need to adjust your calculations should the volume of sales or your raw material costs vary.
Price too high – no one will buy
Price too low – you may run at a loss
A quick search on the internet will help you to find the markup percentage commonly used in your industry. It is also essential to keep abreast of what your competition is charging. If you have many competitors, you may be forced to drop your prices and reduce your profit margin., but dropping your prices below the true cost is unsustainable.