There are different aspects we have to look at when determining the mark-up of merchandise. Some of the things we have to consider are the cost of the item that initially comes out of our overall profits. We use both our long-term and short-term sales and profit goals when selling the product, when we consider the mark-up of the item. We also try to realize how much our competitor will be selling the same item for and we also consider the customer lifetime value of the item.
We take the cost of the initial item as our first consideration in the mark-up of the product being sold, then we have to decide the profit that needs to be made before...
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... finally setting the price. You must figure out the price of the selling cost and then add a predetermined profit number that we are expecting to earn.
It is important to keep the amount of the profit that needs to be met as a top priority but still keep in mind that this profit margin may not be one that the customer is going to be happy with.
The price of the mark-up is also determined by the high or low demand for the product being offered. If you are offering a product that is in high demand, you can use a higher margin of mark-up, because the customer will be willing to pay whatever you are asking if they can’t get the product anywhere else. “If the product you are offering isn’t in high demand because of the market has been flooded with the item, your mark-up won’t be as high,” says Haug, (1997, Haug,) when devoping formulas for pricing.
(1997; Haug Espen Gaardner, The Complete Guide to Option Pricing Formulas, p. 25)