Amie Blackburn
Fin 1380
7/24/2015
Markups and markdowns - Financial Math
In this class I learned time value of money applications in individual settings, firm settings and household settings. Below is a concept I learned that I believe is a very important part within a business in order to generate profits and keep a business afloat.
Markups
Markup is the difference between the cost of a good and its selling price. A markup is usually added to the total cost of an item or service in order to generate a profit. It is Important for a business to know how to adjust inventory or services through markups and markdowns. The prices set influences the quantities of various items or services a customer will buy, which then affects the total revenue and profit for the business. Markups can generate a profit but sometimes if you use a markup that is too high, it will go against your profit. Customers will then chose to get the same product at a lower price from a different supplier. In order for markups to be successful, businesses will need to find a balancing point between margin profit and markup.
Markdowns
Markdown is the reduction of a price usually to encourage buying or getting rid of unwanted products. Sometimes this can cause a negative effect or profit loss on a business. Markdowns can be beneficial to an individual or a household because they are getting a good deal due to the price being markdown.
Business may think that a markdown is profit loss. Today, business could benefit from markdown strategies depending on growing demand, competition and the threat of inflation. Markdowns can benefit a business if they plan ahead and keep an eye the market. A small markdown could generate more business and profit.
Reflective essay
Markups matter to individuals because it affects what we buy and when we buy it. If you are low on cash or trying to save money and go to a grocery store, you may avoid markups and go for markdowns. This dictates what food we buy and what we eat. If you are in an electronic store, you might think an item is the newest and best if it is marked up to a higher price.
Many retailers apply markups to generate a bigger profit. Retailers have to be careful to find the right amount to markup a product. If it is marked up to high, it will prevent the product from selling. If it is not markup high enough, it might not generate the profit the retailer is looking for.
Many retailers apply markdowns to get rid of unnecessary inventory or to compete with other companies in order to get customers to buy the product from them first. Retailers have to do their research on what is the right price to markdown an item or service. If you mark it down too much, you can loss profit. If you do not markdown enough, the business might not be able to get rid of the product or not achieve the goal they are wanting to accomplish with the markdown price.
