Marketing Essentials Chapter 27: Pricing Math

Calculating Prices SECTION 27.1 What You'll Learn How a firm's net profit or loss is related to pricing How to calculate dollar and percentage markup based on cost or retail How to calculate markdown in dollars, and how to determine sale price and maintained markup

Calculating Prices SECTION 27.1 Why It's Important Now that you understand the principles of pricing, it is time to learn how to calculate prices. Wholesalers and retailers, as well as manufacturers and service businesses, need to perform mathematical calculations to determine the prices they will charge their customers. You learned earlier that pricing is related to a company's profitability; now you will learn how they are related.

Calculating Prices SECTION 27.1 gross profit maintained markup Key Terms gross profit maintained markup

Calculating Prices SECTION 27.1 Profit vs. Markup A business’s profit is not the same as its markup. Markup is the difference between the cost of an item and the retail price. Profit is what’s left over after all other expenses have been paid.

Calculating Prices SECTION 27.1 Basic Markup Calculations Retailers and wholesalers use the same formulas to calculate markup. The most basic pricing formula is the one for calculating retail price: Cost (C) + markup (MU) = retail price (RP) Two other formulas can be derived from this formula: Retail price (RP) – markup (MU) = cost (C) Retail price (RP) – cost (C) = markup (MU)

Calculating Prices SECTION 27.1 Percentage Markup In most business situations, the markup figure is expressed as a percentage MU(%), rather than a dollar figure MU($). Most sellers compute markup based on retail price rather than cost because: the markup on retail sounds smaller future markdowns are calculated on retail profits are calculated on sales revenue

Calculating Prices SECTION 27.1 Markup Equivalents Table The markup equivalents table lists markup percentages based on retail and the equivalent percentages based on cost. To use the table, you locate the percentage markup on retail and read its markup on cost equivalent in the adjacent column or vice versa. The table allows users to quickly convert markups on retail to markups on cost and vice versa.

Calculating Prices SECTION 27.1 Cost Method of Pricing Sometimes marketers know only the cost of an item and its markup on cost. In such a situation, they use the cost method of pricing: Multiply the cost by the percentage markup on cost in decimal form: C x MU(%) = MU($) Add the dollar markup to the cost to get the retail price: C + MU($) = RP Slide 1 of 2

Calculating Prices SECTION 27.1 Cost Method of Pricing If you know the cost and the markup on retail, use the markup equivalents table to convert markup on retail to markup on cost, then calculate, using the cost method of pricing: Multiply the cost by the percentage markup on cost in decimal form: C x MU(%) = MU($) Add the dollar markup to the cost to get the retail price: C + MU($) = RP Slide 2 of 2

Calculating Prices SECTION 27.1 Typical Markup Percentage Product Category Typical Markup Percentage Based on Cost Small Appliances (microwave, coffee maker) Large Appliances (refrigerator, dryer) Automobiles Automobile Accessories (sunroof, CD player) Clothing 30% 15%-20% 5-10%* (*note dealers make money on factor incentives and sale of accessories) 15-20% 100% Markup percentages vary with the type of product and business. How would you determine how much a microwave, whose retail price was $159.99, cost when all you knew was the markup percentage based on cost noted in the above table? What would be its cost in dollars?

Calculating Prices SECTION 27.1 Retail Method of Pricing If you know only the cost and markup on retail, you can use the retail method of pricing to compute the retail price. Determine what percentage of the retail price is the cost: RP(%) - MU(%) = C(%) (retail price would be 100%) Determine the retail price by dividing the cost by the decimal equivalent of the cost percentage: C($) / C(%) = RP Calculate the dollar markup: RP - C = MU($)

Calculating Prices SECTION 27.1 The Retail Box To compute retail price using the retail method, fill in the boxes following the letter sequence (J-O). Note that the box labeled “J” (RP%) is always 100%. The amounts that go in the boxes labeled K (MU%) and O (C$) are usually known. Why is this retail box an example of the retail method for calculating markup? $ % $ % Retail Price M J Retail Price M J 100 11.25 100 Markup N K Markup N K 4.50 40 Cost O L Cost O L 6.75 6.0

Calculating Prices SECTION 27.1 Calculations for Lowering Prices When a business lowers its prices, a new sale price must be calculated, as well as a new markup. To calculate a markdown, determine the markdown percentage on retail. Then: Determine the dollar markdown by multiplying the retail price by the percentage markdown: RP x MD(%) = MD($) Subtract the dollar markdown from the retail price to get the sale price: RP - MD($) = SP Slide 1 of 2

Calculating Prices SECTION 27.1 Calculations for Lowering Prices There is another, simpler way to calculate the sale price: Subtract the markdown percentage from 100% (representing retail price): RP(%) - MD(%) = SP (%) (RP = 100%) Multiply the retail price by the decimal equivalent of the percentage sale price: RP x SP(%) = SP($) Slide 2 of 2

Calculating Prices SECTION 27.1 Maintained Markup When a marketer marks down goods, the markup and markup percentage change. The difference between an item's final sale price, and its cost is called the maintained markup. To determine the maintained markup: Calculate the new sale price: RP(%) - MD(%) = SP (%) RP x SP(%) = SP($) continued Slide 1 of 2

Calculating Prices SECTION 27.1 Maintained Markup continued Subtract the cost from the sale price to determine maintained markup (MM($)): SP - C = MM($) Divide the maintained markup in dollars by the sale price to determine the maintained percentage: MM($) / SP = MM(%) Slide 2 of 2

Reviewing Key Terms and Concepts ASSESSMENT 27.1 Reviewing Key Terms and Concepts 1. Explain how a firm's net profit or loss is related to pricing. 2. How are the dollar and percentage markups based on cost and based on retail calculated? Illustrate the formulas for a book that costs $13.99 and has a retail price is $19.99. 3. Assume that an item that cost $125 and currently retails for $279.99 (RP) is going to be marked down 40 percent for a special sale. Calculate the new sale price, as well as the maintained markup in dollars and as a percent.

ASSESSMENT Thinking Critically 27.1 If a buyer wanted to buy goods that cost $100 and the customary markup on retail was 40 percent, what two methods could the buyer use to calculate the retail price? Explain.

Calculating Discounts SECTION 27.2 Calculating Discounts What You'll Learn The general procedure for figuring discounts How to calculate various kinds of discounts

Calculating Discounts SECTION 27.2 Calculating Discounts Why It's Important Discounts affect the final price a customer will pay. Therefore, it is essential that you learn how to calculate discounts and the net price payable.

Calculating Discounts SECTION 27.2 Calculating Discounts Key Terms employee discounts

Calculating Discounts SECTION 27.2 Calculating Discounts Discounts A discount is a reduction in the price of goods and services sold to customers. Calculating discounts involves two steps: Multiply the price (P) by the discount percentage [D(%)] to get the dollar amount of the discount [D($)]: P X D(%) = D($) Subtract the discount from the price to get the net price (NP), or the amount that the customer will actually pay: P – D($) = NP

Calculating Discounts SECTION 27.2 Calculating Discounts Employee Discounts Businesses offer employee discounts to encourage workers to buy the products they sell or manufacture. Employees who buy and use their company's products project confidence in and enthusiasm about them. Employee discounts can range from 10 to 30 percent for entry-level employees and as high as 50 percent for top-level executives.

Calculating Discounts SECTION 27.2 Calculating Discounts Discounts from Manufacturers and Distributors Some common types of discounts offered by manufacturers and distributors are: cash trade quantity seasonal promotional discounts

Calculating Discounts SECTION 27.2 Calculating Discounts Cash Discounts A cash discount is a discount offered to buyers to encourage them to pay their bills quickly. With the invoice terms 3/15, net 60, the first number (3) represents the percentage of the discount applicable to the invoice total (P). Slide 1 of 2

Calculating Discounts SECTION 27.2 Calculating Discounts Cash Discounts To calculate the cash discount: Determine the dollar discount: P x D(%) = D($) Determine the net price: P - D($) = NP To determine a cash discount on a unit price, do the same calculation, with P equaling the unit price. Slide 2 of 2

Calculating Discounts SECTION 27.2 Calculating Discounts Trade Discounts Trade discounts are based on manufacturers' list prices. They are calculated in the same way as cash discounts: Determine the dollar discount: P x D(%) = D($) Determine the net price: P - D ($) = NP

Calculating Discounts SECTION 27.2 Calculating Discounts Quantity Discount Quantity discounts are offered to buyers for placing large orders. Quantity discounts may be quoted as either a percentage of price or as part of a quantity price list. Slide 1 of 2

Calculating Discounts SECTION 27.2 Calculating Discounts Quantity Discount Using a quantity price list: No. of items 1-24 25-48 49-72 Unit price $.95 $.90 $.85 If you purchased 50 items, you would pay $.85 each. Your total bill would be $42.50 ($.85 X 50). A cumulative discount is quoted as a percentage and is calculated like a cash discount. Slide 2 of 2

Calculating Discounts SECTION 27.2 Calculating Discounts Promotional Discounts Promotional discounts are given to businesses that agree to advertise or promote a manufacturer's products. When the promotional discount is quoted as a percentage, it is calculated the same way as a cash discount. If a dollar discount is given, calculate the discount percentage this way: Divide the dollar discount by the original price of the order: D($) / P = D(%)

Calculating Discounts SECTION 27.2 Calculating Discounts Seasonal Discounts Sellers offer seasonal discounts to encourage buyers to purchase goods long before the actual consumer buying season. To calculate the net price with a seasonal discount offered as a percent: Determine the dollar discount: P x D(%) = D($) Determine the net price: P - D($) = NP

Reviewing Key Terms and Concepts ASSESSMENT 27.2 Reviewing Key Terms and Concepts 1. What procedures are used to calculate the dollar amount of a discount and the final selling price? 2. Carlo's Ice Cream Specialties gives all of its employees a 15 percent discount on ice cream cakes. What would an employee pay for a chocolate ice cream cake that is $13.75?

ASSESSMENT Thinking Critically 27.2 Thinking Critically Assume you are given a trade discount of 30 percent and a seasonal discount of 10 percent. You also take advantage of a cash discount of 2 percent. Would you be entitled to a 42 percent discount? Explain.

Promotional Discounts 27.2 Graphic Organizer Discounts from Manufacturers and Distributors Discounts from Manufacturers and Distributors Cash Discounts Trade Discounts Quantity Discounts Promotional Discounts Seasonal Discounts