Content
- What is trade markup?
- Types of markup
- Factors affecting the size of markup
- How to attract customers without lowering markup
What is trade markup?
Trade markup represents the added value to the purchase price or cost of a product or service. The seller sets the markup to cover expenses related to logistics and promotion, as well as to obtain a profit from sales. The final price of the product offered for sale is formed from the purchase price and the markup. The purchase price is the amount at which the manufacturer transfers the product from its warehouse.
To earn a profit, the seller adds markup to the purchase price. The formula for calculating markup is as follows:
Markup = Selling Price - Purchase Price
Types of markup
There are several types of markup that can be absolute or relative. Absolute markup is expressed in numerical value. For example, if a wholesale buyer purchases black tea for 100 rubles and sells it for 125 rubles, the absolute markup will be 25 rubles. At the same time, relative markup is often expressed as a percentage, and the following formula is used for its calculation:
Relative Markup = (Selling Price - Purchase Price) / Purchase Price * 100%
In the case of tea, the relative markup will be 25%. Additionally, markup can be minimal or maximal. For example, supermarkets often set a minimal markup on staple products, earning profit through sales volume, while maximal markup is set on expensive items, such as cars or luxury goods.
Factors affecting the size of markup
The size of the markup is influenced by several key factors, including the type of product, level of competition, market condition, purchasing power, and tax costs. The more unique the product, the higher the markup can be. For example, handmade artisan products may have significantly higher markup as buyers are willing to pay more for uniqueness.
Challenges in transportation and storage can also increase markup. For instance, fresh flowers require special storage conditions and have a short shelf life, which can lead to markup of 100-300% to cover potential losses. It is important to note that markup can vary depending on the season: for example, in winter, the demand for fur coats increases, allowing sellers to raise markup, while summer often sees sales.
How to attract customers without lowering markup
To attract customers without resorting to lowering markup, sellers can use various marketing strategies. For example, the price tags may show a high initial price that is then crossed out, with a discounted price listed below. This creates the illusion of a good deal, although the discount may actually be just the average market price.
Other effective methods include loyalty programs and bonus systems. For example, with regular purchases, customers can accumulate points that can later be used to pay for part of their next purchases. Discounts can also be offered to wholesale customers who pick up the goods themselves, allowing the manufacturer to save on delivery.
Offering additional products or services can also be a good strategy. For example, when selling an expensive computer, peripheral devices can be offered at a reduced price. Promotional activities, such as participation in lotteries or receiving free gifts, can also help attract customers without lowering markup.