The Notion of Markup

A retail pricing concept that I have seen used in manufacturing and distribution companies as well, but can be misunderstood, is that of markup. As excerpted by Entrepreneur online, the author Ronald Bond notes that a standard "markup" for retail products is 50%. That is a retailer will double the price he paid for a product, ergo a bottle of rum bought in bulk by a liquor store at $12 per bottle would in this case go on the shelves for $24.

Now, you say, wait a minute, that's a 100% increase. So it is, but it's a 50% markup to the retailer. Why is this standard and justified? Because retailers have costs beyond their direct purchase price. There is rent, insurance, salaries, benefits, heating, lighting, etc. It's a good rule of thumb to consider when selling at retail and this 50% usually results in a net profit margin for the business of 5%-10%.

As a rule it's wise to avoid discussions of markup with your customers, what they need to understand is that you price your offerings to sustain a viable business, and if value meets or exceeds the price they won't care anyway.