What is markup in pricing?

Markup in pricing refers to the practice of adding a predetermined percentage of the variable cost to the price of a product or service. This method establishes the selling price by taking the variable costs associated with producing or providing a good and then increasing that base cost by a specific percentage. This percentage is often determined by considerations such as desired profit margins, competitive pricing, and market demand.

Using a percentage of variable costs ensures that the markup is directly proportional to the costs incurred, which is particularly useful in industries where costs can vary significantly. It enables businesses to adjust their pricing strategy in response to fluctuations in production costs while still aiming to maintain their profitability.

In contrast, adding the total costs to the selling price does not accurately reflect the markup concept since it does not factor in a percentage of the variable costs. Similarly, adding a fixed dollar amount to costs does not allow for flexibility based on the variable costs, and determining prices based on customer feedback is a different pricing strategy that focuses on market perceptions rather than cost structure.