Pricing Table Topics: 8 of Clubs – Ban the Word 'Markup'

Impact Pricing

This one is the 8 of Clubs from the Impact Pricing card deck.

 Ban the word markup. First, can we all agree that cost-plus pricing is not optimal? We really want to do value-based pricing, charge what a customer is willing to pay. Got it, so we're all in agreement.

Now, let's talk about the word markup. Markup is defined as, tell me what my costs are, how much do I need to mark that up in order to get the margins that I want?

So a markup is by definition cost-plus. Well, it's cost-times, but it's cost-plus. So when we use the word markup, as a company, we're saying we use cost-plus pricing. Now, it is okay, let's say you're running a distribution organization. You're running a grocery store. You've got hundreds of thousands of products to price.

You can't do specific value-based pricing on each one of those products. And so, you have to do something. But don't do just cost-plus. When you say we use a 50 point markup or a 20 point markup, we're implying that goes across the board. What we should be saying is, how much margin do we think we can get from this product category?

Because margin starts at, what's the price? And then, how much did we have to pay to acquire the product that we sold? So margin is a great term to use when we're thinking about value-based pricing. Markup almost forces us to use cost-plus pricing.

So my advice, stop using that word. Don't let anybody else use that word. Switch your mental thought process to margin, not markup.

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