PART 3 — What is markup, and how do we say that our markup is just right.
If you’re still with me (And I hope you are), we now understand what costs are, and how they contribute in delivering value to our customers and how use them in our computation of trucking rates in the Philippine settings.
In this article, we will now proceed to the most exciting part of computing prices in any business and that is computing the most reasonable markup to complete the Vat-ex pricing of our offerings. We hope to create the most ideal trucking rates that are vital to profitability, and sustainability of our businesses. We call this “mark up”, or in filipino, tubò.
What is markup?
Merriam-webster defines “Markup” as any amount that you add on top of the cost to determine the selling price. It is the essence of doing your business — profit.
Unfortunately for most, there are many variables that influence the markup you put in your selling price. It is not a unilateral decision to make, except when you’re the only business providing the service or product in a monopolized market that you can easily dictate your markup without the threat of any alternative or competition. But for most us and in reality, markup is usually influenced by many variables — your market strategy, competition, demand & supply, government regulations, and others.
What’s the best way in placing the markup on my costs?
To put simply, there is no single, best way to quantify or place markup in your equation. As discussed earlier, placing markup is heavily influenced by many variables. However, if we are to simplify and place something concrete here, markup maybe primarily be determined by following this nested approach in order of sequence:
- Marketing Strategy
- Competition
- Desired profit
“There is no best way to quantify a markup.”
Marketing Strategy. In simpler terms, there is a need to know and understand your market, and how you intend to position your products or services. Once your desired market is understood, and defined, you need to then create a strategy in approaching your desired market. Would you either go on a cost-leadership approach, or differentiation strategy? If the market dictates that generally, the market is cut-throat competition, then you’d naturally opt and go on a cost-leadership strategy. This may persuade you to place your markup on the lower end of the spectrum, or range.
However if knowing this market and you choose to be on the other side, then you’d go on a differentiation strategy, and come up with something different with what most offer, you can also narrow your focus and select niche or underserved areas of the market. For example, hauling or trucking of heavy equipment is generally priced higher and may have higher markup or profits compared to hauling or trucking of containerised shipments, the same may be true or applicable with hauling or trucking of fuel or oil.
Competition. Once you have a clear understanding of your market, the next thing to consider in our basic triage is your competition. How your competition behaves generally will dictate your control or command of your markup or pricing. The basic principle is that if you have an overly crowded or saturated market where many suppliers, sometimes greater than the demand, are able to fulfill the current demand of the market, generally, prices tend to go lower in pursuit of capturing market shares. Consequently, you may need to adjust your markup lower than what you expected or desired.
However, if the market you desire to play with has fewer competitors resulting to lesser competition, then you have better control and command of your markup. Say for example in the case of Meralco, being the only power distribution company in Metro Manila, it is able to monopolise the market and command better profitability for its company since it has no competition in Metro Manila. In simpler terms, people in Metro Manila has no other options, but bite into the prices dictated by the company. In cases like this, you have the power to place higher markup in order to drive profitability.
Desired Profit. Decades ago, desired profit can easily be one of the easiest and fun filled activities in doing business. This is because the profit is the end-reward of all endeavours made. But in most recent times, banking on desired profit alone as a factor in placing your markup could be a difficult path to follow. But it is still a factor to consider. After all, when you run a trucking company, you still make the decision to pay your business for the services done based on your perceived value too, regardless of competition, or alternative, it is you who dictate your desired profit or markup, with finality.
Place your Desired Profit too high, and you run the risk of losing customers because your selling prices or rates are way off the charts, and out of relevance. Place your prices or rates too low, and you’ll run the risk of losing profitability, especially with many unexpected costs or expenses, or risks in running a trucking business in the Philippines.
Our final take:
From 1% to as high as 100% or beyond, based from your total costs (combination of variable and fixed costs), there is no single, best way, to price or place markup to complete your prices. Ultimately, how you place markup on your costs will be influenced on how you look into your end goals, and how you use marketing strategy, competition, and desired profit to play with them in computing your prices.
Anyway, whatever markup you place, know that you can always make adjustments anytime you wish to do so.
In these series of articles, we have already talked about variable, fixed costs, cost of sales, and overhead expenses (general admin, and selling expenses), and now our markup. The final component is to add on government mandated taxes in the Philippines which we will be discussing in the next article. So we hope that we are giving you value and knowledge, and please do continue to follow these learning materials. At the end of these learning materials, we will hand our a free trucking calculator. So please send your information HERE.
NEXT: PART 4 — Inclusion of Government mandated taxes in the computation of Trucking Rates
