Cost-Oriented Pricing Equations

Learning Objectives

  • Using cost-oriented pricing equations, calculate the retail price, the cost, and the markup percentage of a product

We touched on this topic briefly in an earlier section when we calculated the markup of an item costing $4.00. We also discussed the concept of keystone pricing, which is simply a straight 50% markup on all items regardless of cost. We can easily calculate the different components of retail pricing using known variables.

To calculate the retail price based on cost requires knowing your markup objective. Markup, again, is the difference between what the retailer paid to a vendor for the product and the price at which they sell it to their customers. So for a target 53% markup on an item costing $9.00, we will need two steps. First, we need the “cost complement” of the markup which is calculated as:

Cost Complement = 100% − Markup

Cost Complement = 100% – 53%

Cost Complement = 47% or .47

Then we simply divide the cost of the product by the cost complement to arrive at the retail price.

Retail Price = $9.00 / .47

Retail Price = $19.15

To calculate markup percentage based on cost and retail price, we use the formula discussed earlier:

*Retail price minus cost price divided by retail price*

So if your item cost is $4.00 and you sell it for $10.00, you would calculate markup as:

($10.00  $4.00 = $6.00) /$10.00 = .6 or 60%

Finally, to calculate cost based on retail price and markup with a retail price of $25.00 and a markup of 55%, we would use this formula:

Cost = Retail price * Cost Complement

Cost = $25.00 * .45

Cost = $11.25

Practice Questions