How do I Choose the Best Markup Percentage?
The markup percentage is the amount of money a given item or product is marked up before it is resold. Items generally come from a main manufacturer or producer to a reseller or distributor. The end user or consumer buys the products from the reseller. Since the reseller does not produce the products and must buy them from the manufacturer, the reseller makes a profit only if he charges more for the product than he paid for it. This additional amount he charges is the markup and is usually based on a percentage.
The markup percentage is usually a percentage of the cost to purchase the item. For example, if a person has a 50 percent markup percentage and purchases the item for $10.00 US Dollars (USD), then his percentage would be 50 percent of $10.00 or $5.00 USD. This would mean the item should be sold for $15.00 USD.
To choose the best markup percentage, first determine whether there is an industry standard or a standard in the local area. The appropriate markup can vary dramatically. Some experts recommend that the retail markup be set at 40 percent of cost, while others recommend setting the markup at up to 100 percent of cost. A great deal will depend on the area in which the store is located and the item is sold. There may be less of a markup on items sold in a grocery store, for example, than a markup on high-end clothing or luxury brand items, which typically have a high markup.
The manufacturer who provides the product for sale to the reseller can also help determine the best percentage of markup. If the manufacturer's markup is followed or the manufacturer's suggested price is used, then it is likely the markup percentage will be closely in line with what other retailers are doing. This can be advantageous, as the goods sold will not be priced higher than others in the market while profit will not be lost as a result of charging too low a price.
Certain items are also known as having a very high markup. For example, soda and liquor generally have some of the highest markups in the market. This means they can be purchased for much less than the items are sold for.
When I started publishing my own books, the standard advice on markup was to take the wholesale cost of the book and double it. If I had to pay $3.00 per book, my markup price should be $6.00, although it would be closer to $5.95 on store shelves. I thought a 50% markup sounded fair enough.
What I didn't consider were the costs of promotion and delivery. In order to get word of my books out to the general public, I had to buy a lot of advertising. I also had to spend a lot of valuable time online promoting my titles. Fulfilling orders through the mail also proved to be more expensive than I anticipated. I felt like the only way to get ahead of all of those expenses was to raise the price of my books to $8.95. The first markup percentage was clearly not enough for me to earn a profit.
I think another consideration would be the number of middle men between the manufacturer and the retailer. The manufacturer may only want 50 cents per unit, but there could also be a wholesaler/distributor who buys in bulk and warehouses the product for retailers. That person may also want a cut. If someone works on commission for the retailer and sells the product, he or she may also be entitled to a piece of the sale. It all adds up, so a retailer may have to consider all of those other outgoing expenses when establishing a retail price.
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