Initial & Maintained Retail Markup: Definition & Calculation

Instructor: Beth Hendricks

Beth holds a master's degree in integrated marketing communications, and has worked in journalism and marketing throughout her career.

Pricing strategies in retail require careful thought and planning. In this lesson, you'll learn more about initial and maintained markup, how to calculate initial markup percentage, and key figures necessary for those equations.

Initial Vs. Maintained Markup

Tammy has recently taken in a shipment of sweatshirts that are supposed to be the hot ticket item for her company, thanks to a recent celebrity endorsement on a popular talk show. When the sweatshirts arrive, they have an initial markup, the price assigned to the item, of $129. But after a few weeks of languishing on the store's racks due to less-than-stellar sales, the sweatshirts are reduced to $79, the maintained markup, or actual selling price minus cost.

Initial versus maintained markup is a pricing difference frequently encountered in the retail environment. Though every retailer would like to sell an item for its initial markup when it arrives at the store, the maintained markup is actually a better indicator of the retailer's profitability because it takes into account price reductions, specifying what the item actually sells for minus what it cost the retailer. If Tammy's sweatshirts sell for $79 but cost the company $29 apiece, the profit on them drops to $50 from an initial outlook of $100.

Let's take a closer look at how initial and maintained markups are calculated.

Calculating Markups

Using Tammy's sweatshirts as our example, let's examine each of the equations for figuring initial and maintained markup.

Initial markup can be calculated by taking the original retail price of an item minus cost divided by the original retail price. So, a working equation might look like this:

  • Initial markup = (Original price - Cost) / Original price

For Tammy's sweatshirts, the calculations would be as follows:

  • Initial markup = ($129 - $29) / $129 =$100 / $129 = .775

In this example, the initial markup is 78%.

To calculate maintained markup, you use a similar equation, but with actual retail pricing. It would look like this:

  • Maintained markup = (Actual retail price - Cost) / Actual retail price

Using our sweatshirt example, here is a working equation:

  • Maintained markup = ($79 - $29) / $79 = $50 / $79 = .632

In this example, maintained markup is 63%.

Determining Initial Markup Percentage

When an item arrives in a store with a pre-determined price tag, that price has not been decided upon casually. In fact, there are many factors that go into determining that initial markup percentage such as the following total reductions, all of which reduce possible revenue:

  • Operating expenses
  • Net profit
  • Markdowns
  • Stock shortages (such as theft or clerical errors)
  • Discounts for employees and customers
  • Cost of alterations for clothing

Retailers must also account for cash discounts given to vendors or suppliers for quick payment of their bills. This can reduce the cost of merchandise, which also impacts markups. Thus, the initial markup percentage can look quite complicated, something like this:

  • Initial markup percentage = (Operating expenses + Net profit + Markdowns + Stock shortages + Discounts + Alteration costs - Cash discounts) / (Net sales + Markdowns + Stock shortages + Employee and customer discounts)

That's a mouthful, right? Let's look at it with some actual numbers to determine initial markup percentage. Let's envision the retailer from the lesson's opening. They plan to do $2 million in net sales for the year, with operating expenses of $325,000. Their net profit goal is $80,000. Planned reductions include $50,000 for markdowns, $15,000 for stock shortages and $5,000 for discounts. Alterations costs should be about $15,000 and cash discounts for vendors come in around $10,000.

Now, let's plug that into the equation:

  • Initial markup percentage = ($325,000 + $80,000 + $50,000 + $15,000 + $5,000 + $15,000 - $10,000) / ($2,000,000 + $50,000 + $15,000 + $5,000)
  • = ($480,000) / (2,070,000) = .231 = 23%

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