Page 360 - Introduction to Business

334 PART 3 Marketing

EXHIBIT 9.10 has in selling the product as well as the profit the retailer desires. Markup can
be expressed three different ways: as an absolute figure, as a percentage of
Common Markup Percentages
on Cost and Price cost, and as a percentage of price.
Let’s assume that a retailer paid $10 for a dress and put a price of $15 on
Markup Equivalent Markup it. As an absolute figure, the markup is $5, that is, the difference in the cost of
Percentage Percentage the item and its price ($15 $10 $5). As a percentage of cost, the markup
on Cost (%) on Price (%) is 50 percent ($5 markup/$10 cost 50 percent). As a percentage of price, the
markup is 33.3 percent ($5 markup/$15 selling price 33.3 percent).
10 9
Each and every markup percentage figured on cost will have a unique and
20 16.7
corresponding percentage when figured on the price. In the above example,
25 20
the markup figured on cost of 50 percent is equivalent to a markup on selling
30 23
price of 33.3 percent. Exhibit 9.10 provides a number of the most commonly
33.3 25
used markup percentages. In practice, most retailers figure the markup on
40 28.6
the selling price, not on cost.
50 33.3
Markup is an important concept for retailers because it is closely related
60 37.5
to profit. The markup has to be sufficiently large to cover the expenses of
75 43
operating the store and provide an acceptable rate of profit. Most retailers
100 50
either apply a similar markup percentage for all products received or use dif-
ferent percentages for related groups of products. Jewelry and furniture, for
example, generally carry higher markups than clothing or food items.
The danger of mechanically applying a markup percentage to merchandise is
that the resulting price may not be the best one as far as maximizing profits is con-

Ethics in Business

Companies Charge Fees Because They Can’t Raise Prices

In deflationary periods, periods with costing about $100) are examples. Some airlines are
falling prices, companies find it difficult charging extra for food.
to raise prices or even maintain them. So they often Retailers are getting into the act. Target and Best
resort to charging fees for a variety of services Buy force customers to pay 15 percent of a product’s
performed that they ordinarily would not charge for. price for returning expensive electronic items (called a
Often, these charges are in fine print, causing some restocking fee). And so are state governments with
business observers to label them hidden charges. $2.6 billion in new income for driving-without-a-license
It has been estimated that banks and other fines, court filing fees, and late-bar-closing fees.
financial services firms take in an extra $50 billion What are the results of these policies? They make
annually from charging fees for various services. This it almost impossible for consumers to compare
amount results from bank customers paying extra for prices. Consumers become frustrated and angry.
bounced checks and using automated teller machines. “Stealth” inflation occurs, making it more difficult to
Credit card companies rake in $20 billion a year from develop economic policy. Companies spend a lot of
such charges as late payment fees. time contriving new and even more complicated ways
The wireless, long-distance, and cable company to charge fees.
industries generate $33 billion a year from fees for
Source: Emily Thornton, “Fees! Fees! Fees!” Business Week,
setup, change of service, service termination, directory September 29, 2003, pp. 99–104.
assistance, regulatory assessment, number portability,
and cable hookup and equipment. Overall, fees add 20 Questions
percent to the cost of wireless, 15 percent to the cost of 1. Do you think restocking fees are ethical?
long distance, and 5 percent to cable and satellite bills. 2. Do you think companies should be allowed to
Airlines take in $17 billion annually by charging charge fees when they find it difficult to raise
fees. Airport security fees, landing fees, fuel prices?
surcharges, paper ticket fees, overweight baggage 3. Should airlines be charging customers for meals
fees, and fees for changing a reservation (usually during a flight?
Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.