Retail Strategy Secret #9: Mark-Up Pricing

markup

Welcome to the ninth post in our series of “Retail Strategy Secrets” (and we’re only about half-way through)!  Here you will learn the angles, approaches, and tactics retailers are using every day to try and separate you from your hard-earned cash.  Understanding these unlocks the door to spotting great deals, and you never want to pass up a Dealicacy…

Mark-up Pricing

“Mark-up” (also seen as markup, and commonly referred to as margin) is basically an amount added to the cost of an item.  The cost plus markup equals the selling price, and the markup is usually based on a percentage of base cost of the item.

Pretty straightforward, I know.  However, there’s a bit more to it. The base cost as viewed from a retailer’s standpoint is already a multi-layer markup rooted in a number of factors.  Additionally, each layer includes a particular entity’s profit margin and operating expenses for bringing the product to market.

So how does knowing this improve our chances of finding a Dealicacy?  Glad you asked… Very briefly, mark-up can be chiseled down to three main facets: links in the supply chain, product type, and convenience.

Let’s explore this a bit with an example. Have you heard of the brand of electronics accessories that goes by the name “Monster”? These are typically brightly colored cables and power strips (such as HDMI, surge supressors, etc.) that are positioned to be *very* high end.  By price point there are generic (store brand) cables, then there are name brand (Sony, etc.), and then there is Monster. Yep, the gold-plated ultra-low resistance stuff.

Are these any better than the generics?  Possibly.  But how much better?  Not likely proportional to the amount of markup they carry.  Just getting pitched on an item by a salesperson (even if they are not on commission) can give you a pretty good idea of how much an item is marked up, and what goes into that markup.

Here’s where the “product type” factor comes into play.  If the item can be considered an *accessory* to another larger-ticket item sold by the retailer, chances are there is a great deal of markup.  For more prominent items, the mark-up can contain anything from funding for rewards and bonuses (employees from top selling stores get to go to vendor-sponsored concerts, parties, etc.) to advertising (the commercial you just saw on tv that featured even a glimpse of the product). Even returns allocations where the retailer can return a set percentage of total items they bring to market before being penalized. Ever wonder why some products are so easy to return while others warrant a virtual interrogation?

And all of this is in addition to the base cost of the product, which brings us to the second component, “supply chain.” This represents how many steps it takes and how many times a product changed hands to bring it to market.  Generally speaking, the more steps, the more mark-up.  And each change of hands prior to the retailer taking possession adds a percentage mark-up *before* the retailer adds theirs.

All of this is how a 5-cent piece of plastic gets to be a $14.99 Food Network cutting board, or six feet of HDMI video cable gets to be $89.99. Raw material (braided copper wire), manufacturer (dip in vinyl, wrap in pretty colored fabric, affix electroplated connectors), exporter (depart China), importer (enters California port), distributor (warehouse), licensor (brand names often aren’t “affixed” until this late in the process!), and then finally retailer.  Markup upon markup, three times over. I guess this is why it’s called “Monster” – it’s downright scary.

When you recognize this situation in the future, your best approach is to *walk away*.  Why? The remaining factor is convenience. Items carrying high mark-up (and high margin) are often placed where they are easy to notice and easy to grab. Ever wonder why all the name brand items are at eye level at the grocery store?  It makes it that much easier to pull one over on the consumer – “Wow, I am getting such an amazing deal on [big ticket or advertised item], I should reward myself and get the most out of my [big ticket or advertised item] by buying this quality [accessory].”

So where to go after you walk away?  First off, congratulations!  You are strong my friend, not many people have the willpower to Back Away and forego convenience.  Your Dealicacy can be found at a different retail outlet that delivers the three talked-about facets in a combination more friendly to your wallet.

  • Want fewer points in the supply chain? Try MeritLine.com, a direct reseller from China and skip a few layers of mark-up.
  • A retailer that doesn’t focus on big-ticket items and “package” deals?  Amazon (check their “buy all three” suggestions and notice there is rarely any additional discount offered!)
  • You can also try your hand at any number of daily liquidation sites, or even watch eBay’s Daily Deals.

Retail Strategy Secret #10 is next… a little bit of fun with the ins and outs of Vendor Pricing (with many more to come thereafter)!

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3 Responses to “Retail Strategy Secret #9: Mark-Up Pricing”

  1. Chris Lip says:

    Lately I’ve been seeing articles on this topic one after another. I’m always very grateful for everyone who shares them.

  2. Leslie Kinzig says:

    Great, I’ve already bookmarked your this web page…Now I don’t have enough time for learn but by reading beginning half I must say…it was a positive begin .. Would like to read additional too…Thanks for great post!

  3. Noble says:

    Part of the definition of a competitive market is a large number of buyers and sellers. Obviously, you’re not going to have that on the other side of airport security. So the market is more like an oligopoly. As the article explains, they regulate it to street-level prices – what you would pay in a normal store outside of an airport. Price regulation for a monopoly/oligopoly is standard stuff in economics. The idea is that prices are not competitive in certain markets (like airports), and therefore regulation is needed. I understand some people may not agree with such regulation, but it’s not a new type of policy.