Markup and Markdown

Determining an appropriate selling price for a company’s goods or services is an extremely important function in business. The price must be attractive to potential customers, yet sufficient to cover expenses and provide the company with a reasonable profit. In business, expenses are separated into two major categories. The first is the cost of goods sold. To a manufacturer, this expense would be the cost of production; to a wholesaler or retailer, the expense is the price paid to a manufacturer or distributor for the merchandise. The second category includes all the other expenses required to operate the business, such as salaries, rent, utilities, taxes, insurance, advertising, and maintenance. These expenses are known as operating expenses, overhead expenses, or simply overhead. The amount added to the cost of an item to cover the operating expenses and profit is known as the markup, markon, or margin. It is the difference between the cost and the selling price of an item. Markup is applied at all levels of the marketing channels of distribution. The formula that describes this principle is known as the retailing equation. Manufacturers and most wholesalers use cost as the base in calculating the percent markup because cost figures are readily available to them. Retailers, however, use selling price figures as the base of most calculations, including percent markup.