Markup Codes for inventory parts are defined for automatic calculation of selling prices. This allows the markup percentage to change when the item cost increases. This screen also allows three different resale price levels to be set based upon the unit cost. Example: Price A could be the normal price, Price B could be the sale price, and Price C could be the price of the item for customers with a service agreement.
When a markup code is applied to a part, the markup percentages will be multiplied by the part cost to achieve the three levels of resale pricing, corresponding to your A, B, and C customers.
Creating a Markup Code
- To create a Markup Code, head to Inventory → Enter Markup Codes.
- Click Add New to create the new code.
- Assign a Markup Code to this setup (the code has a 2-digit limit).
- Now enter the first cost value range.
- Enter the markup percentage for the A, B and C prices for that first range. Continue entering cost ranges until you reach $9,999,999.99.
- Click Save when you are done.
You can have as many markup codes as you like, although most companies get by with just one or two.
After creating your markup codes you will generally want to assign them to part categories. You can do that by heading to Inventory → Enter Part Categories and editing your individual Categories and Sub-Categories.
Markup Codes in Action
Markup Codes can be assigned individually to inventory items, or they can be set as the default for certain Categories/Sub-Categories, so that when a new item is assigned to a Category and Sub-Category, the Markup Code is automatically assigned. Generally, Markup Codes are based on the Average Cost of an item, so that as the cost of that item fluctuates, the item can be recalculated accordingly. If your code(s) will be based on the Base Price of the item, be sure to assign a Base Price when the item is created or your Price fields will be set to $0.
Each time an item is received into stock through the Receive Items screen, you'll be asked to enter what was paid for that item. As inventory items flow in and out of ESC, the Average Cost field will change.
The prices of an item can be recalculated manually by going to the Item List, selecting the item you wish to update and opening that item in the Inventory Entry screen (double-click on the item). Click the Recalc button at the top of the screen to update the Price fields and then click Save.
You can also update multiple items at once by going to Inventory → Update Inventory Pricing. You may select a single Category to update, a single Manufacturer or a combination of the two. If you leave both fields blank, then all items in your inventory will be recalculated at once. Click the Update button to proceed.
There are two generally accepted ways to set the prices of the items you sell. The first is Markup. The Markup method involves multiplying the cost of the item by a flat percentage rate.
The second method of pricing items is called the Margin method. Many people think that when they apply a 125% markup on an item, they are making a 25% profit when they sell that item. This is a common misconception. As we all know, gross profit can generally be represented as income minus expense. This can be converted to a percentage by dividing the gross profit dollars by the total income. The following formula illustrates this equation:
Gross Profit % = ( income – expense ) / income
If we plug in the numbers from the first method we get:
Gross Profit % = (93.75 – 75.00)/93.75
This equates to a Gross Profit Percentage of only 20%! If you truly want to make 25% Gross Profit, you must use a different calculation to arrive at your final price. This calculation is:
Markup Percentage = ((Cost/(100 – Gross Profit Margin))/Cost) * 100
If we continue the example we previously created, we get the following results:
Markup Percentage = ((93.75/(100-25))/93.75)*100 or Markup Percentage = 133.33%
Now let’s compare the results of the two methods:
Neither method is better than the other. They do produce different results, so it is worth knowing the difference.