# Discuss two main approaches to pricing for new products and give examples to illustrate how each pricing strategy works?

### Sultan Ali

UCL Graduate and Fully qualified accounting and economics teacher

Two pricing strategies include mark up and margin. Both of these methods start from the products cost to determine a selling price. Now before you read below, you should know that Sales revenue - cost of sales = Gross Profit Let’s start with mark-up, sometimes called Gross profit markup. The whole idea is that you’ll add a certain mark-up to the product’s Cost. So if you bought an item for £50 and wanted to have a markup of 20%, the selling price is £60 (50x1.2). Now if you work out the gross profit( sales revenue-gross profit) it gives you £10. Gross profit margin is slightly more difficult: this time if we’re basing pricing on margin then we ensure we have a selling price so that when we divide: selling price / gross profit it will equal to the % desired. Example: a product’s cost is £50 and we desire a selling price that will achieve a gross profit margin of 20%To achieve selling price simply get the cost and divide by the inverse: £50 /0.8( inverse of 20%)= £62.5 Now if you work out the gross profit (sales revenue-cost of sales) you’ll get £12.50, if you divide this by £62.50 i.e. the selling price you’ll get 20%. Try the following for yourself before looking at the answer at bottom of page, good luck :). A) A products cost is £80, and the selling price is achieved via a 15% mark-up. What is the selling price and gross profit? B) A products cost is £90 and the selling price is achieved to obtain a gross profit margin of 10%. What is the selling price and gross profit? Answers: A) selling price 80 X 1.15 =£92 Gross profit= 92-80=£12 B) selling price 90 / 0.9= £100 Gross profit= 100-90= £10