A retailer generally purchases goods from a manufacturer or distributor for a certain amount. This price is often called the wholesale price. The retailer then sells those goods to its customers for a higher amount than he purchased them. This is known as the retail price. Retail markup, therefore, is the difference between the price that a retailer buys goods and the price for which he sells them.
Calculating retail markup is fairly simple when the wholesale price is known. The answer is derived by taking the sale amount and subtracting the wholesale amount. If a person wants to know how what percentage the item has been marked up, she can simply take the markup price and divide it by the retail sales price.
Without retail markup, there is little, if any, reason to have a retail business. When there is no markup, and retailers sell items for the same amount as they purchased them, this is known as selling at cost. When a retailer sells items for less than he purchased them, this is known as selling below cost. In some instances, certain items are sold this way to attract consumers with intentions of reaping profits from the sale of other items. However, selling without retail markup as a general practice is unsustainable.
Consumers often feel cheated when they calculate the retail markup of products they buy. This is because many people find it difficult to comprehend how, although the markup is significant, a business’ profits are low. The reason for this is largely due to exorbitant overhead costs.
A business may purchase goods and sell them for double the wholesale price. However, from the retail selling price, not only must more goods be purchased, but other costs such as rents, salaries, and banking transactions must be deducted. Once all of the overhead costs are deducted, a business may have little or no profit.
This is one reason why retail markup is so important. If this amount is not calculated wisely, a business can quickly go out of business. There are several things that must be considered when determining retail markup. To begin with, the supply and demand of the product must be assessed.
When there is a large demand for products and there are few suppliers, a business can often increase the retail markup substantially. If, however, there is a large demand but many suppliers, it would be unwise for a business to excessively markup such a product. This reveals one of the most important elements in markup decisions: competition.