Dollar Mark-up = (Selling Price - Cost Price) / Selling Price
Percentage Mark-up = (Selling Price - Cost Price) / Selling Price x 100%
Example of calculations: Find (A) given Mark-up % and cost price
EXAMPLE | Manufacturing | Wholesale | Retailer |
Selling Price | (A) = $1.00 | (B) = $1.25 | (C) = 2.50 |
Mark-up % | Given = 50% | Given = 20% | Given = 50% |
Cost Price | $0.50 | $1.00 | $1.25 |
If we want to find (A), we need to use the Percentage Mark-up equation as follow:
Let x be selling price
Let 50% be 0.5
Step 1: (x – 0.50)/ x = 0.5
Step 2: (x -0.50) = 0.5x
Step 3: -0.50 = 0.5x –x
Step 4: -0.50 = -0.5x
Step 5: (-0.5/-0.5) = x
Finally: $1 = x
Selling Price is $1.00!
Same step for Wholesale (B) and retailer selling price (C)
Analysis of Mark-up Analysis:
Mark-up analysis is important for a few reasons. The first reason is to see the profits that each tier of channel partner is earning. The second reason is to manipulate the mark-up % for each tier to alter the price for the final consumers. The third reason is to calculate if the channel members are affecting the pricing strategy for the final consumers and decisions can be made as to removal of channel members after doing some serious calculations that will affect the pricing strategy.
Break-Even Analysis and forecast Market Share
Break-Even Units = Total Fixed Cost/ (Selling price of 1 unit - cost price of 1 unit)
Example: Total Fixed Cost = $550,000; Selling Price = $1; Cost Price = $0.25
Break-Even Units = 550,000/(1-0.25) = 733,333 units to break even.
In order to forecast Market Share, we would need to come out with Market Potential (In the other post). For example, the market potential is 1.5millions of units consumed per year.
Calculations of Marketing Potential: CU x Q x P (Consuming Units over a period of time x Quantity x Price (if you want dollar value, if not Quantity will suffice)
Calculations of Marketing Potential: CU x Q x P (Consuming Units over a period of time x Quantity x Price (if you want dollar value, if not Quantity will suffice)
Market Share = Break-Even units/Market Potential x 100% = (733,333/1,500,000) x 100% = 48% (Ideally for break-even)
So do you think that the company should launch the product according to the statistics calculated? NO
Analysis of Break-even Analysis and forecast Market share:
Break-even analysis is important because the company must calculate the number of units to sell in order to at least break even with that price that they calculated. This allows company to see if the price they set is feasible and estimate the units to sell with view of the entire market potential (a real-time data over a period of 1 year) to see if its feasible. Do you think the example is feasible? Probably no. Therefore, they might re-consider their pricing. Don't get me wrong. Its not that simple. There are many other factor. But suffice to say, break-even is important in the initial phase to strategize for the products.
