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An Introduction to Pricing Methods

In the Price Level form, there is a Pricing Method selection box. This help topic explains the meaning and usage of each.

Charge a Fixed Dollar Amount

This is not used a lot in business, but some companies may what to use this to make sure the expense of handling those small inventory parts are well covered. Essentially, it costs just as much to handle, package, inventory, and distribute small parts as it does to handle one large inventory part.

You decide you want to receive $3.00 for all parts that cost you $0.02 to $1.00.

Direct Cost $ 0.15 Selling Price

$ 3.00

Direct Cost $ 0.77 Selling Price

$ 3.00

Markup Direct Cost by Fixed Dollar Amount

Again, this is not used a lot in business.

You decide you want to receive a $5.00 profit on every part you sell.

Direct Cost $   1.00 Selling Price

$   6.00

Direct Cost $ 11.00 Selling Price

$ 16.00

As you can see, this is not very realistic.

Markup Direct Cost by % (By Markup)

This may work for you, if you want a 20% markup on all parts your sell.

Direct Cost $ 500.00 Selling Price $ 600.00 Formula = $  500.00 x 1.20 = $600.00
Direct Cost $   11.00 Selling Price $   13.20 Formula = $    11.00 x 1.20 = $  13.20

Markup

If an item cost $500 and you want to add a 20% markup:

500 x 20% = $10

$500 + $100 = $600 (Selling Price)

The actual margin on this item is less than 20%.

($600 – 500) ÷ $600 = 16.67%

Retail – Cost) ÷ Retail

Warning: If you want to markup an item 20%, you add 20% of the item’s cost, to the cost. However, a 20% markup does NOT yield a 20% margin! It is important that you utilize margin and markup properly.

By Gross Profit Margin (By Margin)

Your gross profit ratio tells you how much of each sales dollar you can expect to use to cover your operating expenses and profit. A gross profit margin of 0.33:1 means that for every dollar in sales, you have 33 cents to cover your basic operating costs and profit.

In other words, the gross profit tells a company finance net sales minus the cost of goods and service sold.

You want to make a Total Gross Profit Margin of 30%. (Subtract 30% from 100% = 70%)

Direct Cost $ 500.00 Selling Price $ 714.29 Formula =

$  500.00 ÷ 70 % = $714.29

Direct Cost $   11.00 Selling Price

$   15.71

Formula =

$    11.00 ÷ 70 %=  $  15.71

Margin

If the cost for an item is $500 and you want a 30% margin:

$500 ÷  (100%-30%)

$500 ÷  (70%)

$500 ÷  .70 = $714.29

Cost ÷  (100%-GM%) = Selling Price

Note: A variation taught by many accountants is to also include what is known as base overhead factor (BOF). That ranges from 1.25% to 5%. The same margin with the BOF method, in this case 5%, would be as follows:

$500 ÷  (100%-30%-5%)

$500 ÷  (65%)

$500 ÷  .65 = $769.23

Cost ÷  (100%-GM%-BOF%) = Selling Price

Note: In the Margin example above, DO NOT make the common error of multiplying by .70! In this case that would yield a selling price of $850.00; nice if you can get it honestly but the greatest probability is that a competitor would undercut your bid at the same (anticipated) margin!

Multiply Direct Cost by a Number

If you want to markup everything you sell by the same markup amount, you can multiple by a certain number .

If you would want to sell everything at cost and 3x, use this method.

Direct Cost $ 500.00 Selling Price $ 1500.00 Formula = $  500.00 x 3 = $1500.00
Direct Cost $   11.00 Selling Price $     33.00 Formula = $      1.00 x 3 = $    33.00

As you can see, this isn’t very feasible for high dollar amounts; you would probability price yourself out of business.

No Markup

You have a customer who you, for whatever reason, have decided that you will sell parts to at cost (your cost). You would select this method. This will cause all parts to be invoiced at your cost and will indicate to other Total Office Manager users that you have not forgotten to select a markup method.

Examples of Use: The No Markup Method could be used to transfer parts from one division to another. You could also use this method for a customer who you have promised to provide parts to at cost.

Mark Down from List Price

We also offer the ability to enter List Price for items and then markdown from that price to arrive at a retail price.

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Price Level List
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