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Pricing Strategies: Calculation of Prices Based on Markup of Selling Price

Strategy That Uses Selling Price Information to Determine the Cost of a Product


Pricing strategies can be as varied as the types of business firms using them. What works in the pricing realm for one type of firm (usually based on industry segment) may not work for another type of firm. Manufacturing firms usually use a different pricing policy than service firms, for example. Before talking about specific pricing strategies, let's look at the variables that affect pricing policy.

In 2004, Dr. Anne B. Lowery* identified four variables particularly important in small business pricing. The first two, customer and company, are controlled by the company. The last two, competition and constraints are controlled by external factors, however.

Given these variables that help determine small business product and service pricing, there are several factors you must consider. First, the price that you set must be a price that customers are willing and able to pay. Next, you must set your price so that you can at least maintain and, hopefully, expand your market share. This has implications for net income which you assume will come from this product or you should not be offering. Next, if your product is successful, you will find that your competitors want to make a better one or a cheaper one. Last, if you expect to make a profit on your product, you have to price it to cover research and development costs, operating costs, and the introduction of the product. There are many factors that impact the price that you set for your product.

Calculate the Dollar Markup on Selling Price

There are two steps in calculating the Percent Markup on Selling Price. The first step is to calculate the dollar markup on the selling price. The second step is to use the information from Step One to calculate the percent markup on the selling price. The calculations follow:

If we have a product that costs $15 to buy and it cost $10 to make, how do we calculate the Dollar Markup on Selling Price. Selling Price = Cost + Markup

You can switch around the equation to calculate markup - Markup = Selling Price - Cost where $15 - $10 = $5.

Calculate the Percent Markup on Selling Price

If we assume that selling price is 100%, we calculate what percentage of that 100% is the cost and the markup. The calculation would be Percent Markup on Selling Price = $5/$15 = 33.33%.

Dr. Anne B. Lowery Interview, Small Business Management, 6th ed., Byrd and Megginson

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