Review: Basic Metrics of Pricing: Margins and Markups

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Del curso dictado por University of Virginia

Pricing Strategy in Practice

44 calificaciones

University of Virginia

Pricing Strategy in Practice

44 calificaciones

Curso 4 de 4 en SpecializationPricing Strategy Optimization

In this project-centered course, Darden's Ron Wilcox and BCG's Thomas Kohler will walk you through a real-world case, from problem statement to detailed analyses. You'll use all three lenses (cost, customer value, and competition) to recommend an optimal price—and then adjust to market disruptions. Utilizing the concepts, tools and techniques taught in previous Specialization courses—from basic techniques of economics to knowledge of customer segments, willingness to pay, and customer decision making to analysis of market prices, share, and industry dynamics—you will practice setting profit maximizing prices to improve price realization. You'll finish the course with a portfolio-building project that demonstrates your pricing prowess.

De la lección

Retail Market Dynamics

Welcome to the course! We'll kick off the week with an overview of the project, which centers around Philips introduction of an eco-friendly light bulb. Once you've read the case, Thomas and Ron will guide you as you apply the cost lens to analyze the economics of the LED light bulb Philips has introduced to the market. After you've analyzed the economics of the case, Ron and Thomas will debrief to make sure you are on the right track. You will also hear from BCG pricing experts, who will share their lessons and tips gleaned from years of helping clients in multiple industries optimize their prices and improve the bottom line.

Getting Started Assignment 14:59

Review: Basic Metrics of Pricing: Margins and Markups5:45

Calculating Power Usage and Cost3:34

Conoce a los instructores

Jean Manuel Izaret
Senior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Ronald T. Wilcox
NewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Marketing
Thomas Kohler
Associate Director, Pricing
Marketing, Sales & Pricing Practice

Okay, everybody. We're now going to get some terminology

down, some language and in particular, we're going to talk about margins and

markups and how those are different and how they are used in practice.

Margins occur across the distribution channels.

So everybody in business basically tries to make a margin, right?

All that means is you're selling it for more than you are buying it or

making it for, right?

So that's the goal of a lot of businesses.

So, to have a positive margin is a good thing,

what we need to be very careful about is how we use the terminology

to make sure that when we're talking to other business people,

we use the language that they understand and that they can interpret correctly.

So, what is a margin?

Margin is just the selling price minus the class to produce, right?

So that's the basic formula, and remember cause to produce

could be the manufacturer who's actually making the item.

The cost to produce an item for

a retailer is just the amount that they're buying it for, right?

Whatever is the cost it is to get them that good in the door.

It's often expressed as a percent as well.

So the selling price,

think about that is 100%, that's 100% of the cost to consumers.

And then you subtract out the cost which is equal to

either the manufacturing cost or the cost to buy it.

And then that's the margin, the percent margin for that particular business.

So, imagine your selling price is $100 and

your cost to produce is $75, what's the margin?

I bet you all get this, it's just 100- 75 = $25 and that's your margin.

Everybody I know, I have a daughter in the second grade and

this the kind of math I would do with her at home.

So I know you're not in second grade and you can do that subtraction.

The key here is not the math, it's to make sure the terminology is correct.

And that is a margin or a dollar or what we sometimes call a dollar margin, okay.

So a percent margin is the selling price minus the cost divided by the selling

price, now this is a key point to make.

Sometimes, if you hadn't taken this course for example, you might think that

a percent margin would be selling price minus cost divided by cost, it's not.

Margin is defined on a percent basis as divided by the selling price.

In a minute, I'll show you a markup,

a percent markup that's going to have a different formula.

Now, I just did a little bit of algebra on this formula right up here and

you can see from that, that if you know the percent margin.

And you know what it costs you to produce it or

buy it, that directly suggests a selling price.

The reason that formula can be useful sometimes,

is you may have a target margin.

You may know that in this business, you want to make a 30% margin.

This allows you to see how your ultimate selling price would fluctuate

based on the cost that you can procure the item for and

also based on any kind of target margin that you may have.

So that's just that formula rewritten.

So what's a markup?

Well, in a dollar sense, or whatever currency you're working in,

a markup and a margin is exactly the same.

So if a percent or decimal is used, that's when the tricky part comes,

that's when a margin and a markup are going to look different.

In different businesses, talk in terms of margins or markups and

you need to make sure which one they're talking about, so you don't get confused,

and you really know what that 20% means on any particular item.

So how do you calculate a markup?

A markup is that selling price minus cost.

So that looks a lot like margin.

But here, you are dividing by the cost, okay.

So sometimes, smaller retailers will use markups, and

larger retailers will use margins.

The truth of the matter is everybody, you just got to figure out whatever industry

you're in and figure out what the conventions are.

Some use margins and some use markups.

And I just re-wrote this formula just like I did with the margin before so

that if you have a target markup percent and

you know the cost to procure, that directly suggests the selling price.

An example, let's just do a quick one to show you how the percentage margins and

markups are different.

Suppose you're selling price is equal to $10 and

your cost to produce it or to buy it is equal to $5.

Then the way you would do percent margin is to take the $10,

subtract off the $5, and then you divide that by the selling price, that's 10.

So your margin here is 50%.

Your percent markup, on the other hand, so

markup is equal to that same $10 minus 5 but

you are dividing that now by the cost which is $5.

So here, that markup is going to be 100%.

So you can see, it sometimes not a real trivial difference,

it's not like the difference between 19 and 20%.

These numbers can look quite different in a lot of real world situations.

So, I would end this segment by saying,

look, you all can do the math, just make sure you know when you're speaking to

someone about how much money you intend to make on a product.

Or how much money they're making on a product and

you're talking about margins and markups, make sure you know which one is which.

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