Margins and Mark-ups
Break-even prices (production and transaction costs combined) should establish a floor or minimum price. A desired profit goal needs to be added to the floor price to allow for an economic return to management. There are two ways to add a profit goal to a break-even price: price mark-ups and gross margins.
To establish a price mark-up, the desired mark-up percentage is added to the cost of goods. In the case of a person producing their own product, the costof goods is the same as their break-even price. For example, if a product costs $2 to produce and a 50 percent mark-up is desired, the established price would be set at $3 (150 percent of the $2 break-evencost). In general, wholesalers mark up their products 50 percent, whereas retailers may mark up products 100 percent (Adam et al, 1999)
Gross margin (or gross profit is the percent of profit desired to be included in the price (Courteau, 2002) To calculate gross margin subtract the desired margir from 100 percent and then divide the cost of goods or break-even price) by that number. For example, let's assume the desired margin is 35 percent and the break-even price is $2. The sales price to achieve this margin would be $3.08 ($2 65% $3.08) Margins are useful to use and calculate because the natural food store industry, as well as other industries, uses margins to determine profits. The gross margin benchmark for natural food coops is 33- 36 percent for the whole store (Courteau, 2002) Because produce has a 3-5 percent shrink due to spoilage and other factors, produce margins for these stores is probably around 30 percent. If a natural food store, for example, wants to sell a tomato for $3 per pound and have a 30 percent margin, it could pay no more than $2.10 per pound for tomatoes ($2.10 7096 $3.00)