Pricing strategies: The lowdown on mark ups

Understanding mark ups is one of the pricing strategies you will need to understand as a soloist. The points below may provide a useful checklist.

So what are mark ups and when do you use them? How do you apply them? How much should they be?

What are mark ups?

The mark up is an amount added to your supplier cost, thus increasing the price, or 'marking it up'. The new cost -supplier cost plus mark up - is the amount you will charge to your client.

The aim of applying mark ups is to charge your client enough to cover the supplier cost plus:

Your time incurred whilst briefing/negotiating/arranging the product/service.
Your administration costs (phone calls, faxes, meetings, contribution towards general overheads like rent, power etc) incurred whilst organising the product/service.
Your intellectual property (IP), the value of your knowledge and relationship with that supplier.
Your technical expertise/know-how of the product/service.
To earn a profit on providing this service.

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When do I mark up?

As a soloist making many decisions about pricing strategies for the good of the business, all of these factors should all be considered when deciding when to mark up a supplier invoice:

The bottom line compared to competitors’ prices
Client relationships
Supplier relationships
Commercial ethics
Competitive edge
Benchmarks

How much do I mark up?

It is quite reasonable to implement different levels of mark ups, for example:

For your basic services such as administration supplies (photocopying, stationery etc) +10%
Slightly more involved and difficult negotiations requiring personal attention +20%
Your IP, expertise and technical skills required for negotiations (Design and Manufacture) +30% or more

The idea is that your client compensates you for your effort in negotiating the supply of goods/services on their behalf, because they don’t have the time, or perhaps they are not expert in that field.

The mark up should also reflect your IP value (to your client) of your knowledge of the product/service and for your supplier contacts/database which you have developed and nurtured over the years.

The quality of your service such as your ability to communicate your clients’ requirements to your supplier, and your intimate knowledge of both your client requirements and selected supplier’s product/service and processes - also adds value to delivery of the product/service to your client.

In some cases you may find that your client has engaged you quite late in the process and/or requires you to get them out of a pickle. In this case you might consider a higher mark up to ‘buy’ your immediate attention and personal handling of the job whilst under time pressure.

Applying a suitable mark up will remunerate you accordingly.

Read the follow up article on the mark up principle in action and a detailed example which you will be able to instantly apply to your solo business.

Kathryn Williams is a business and finance consultant who has worked in Europe and Australia. Expert in transforming ideas into action, and sustainable benefits, she works alongside management to improve operational performance and profitability.

5 comments | Add your own

I’m notoriously slack with marking up, so I really needed to read this. Thanks, Kathryn! Faye Gillam from Penzance, UK
Oh yes:
Had to have a lot of seminar session tapes transcribed - I was subcontracting through a worldwide training company for a huge project for a global corp.
I had to pay the transcription company ... and then was abused because I told the end client the rate for the transcriptions - the in-between company wanted to only reimburse me the transcription costs ( after a delay of 90 days) ... and then to double the invoice value and charge it on the the end-customer ...
I have vowed never again to sub contract - I ended up with huge expenses, cash-flow, credit card interest, and then got cut out of the contract I scooped and sold for the next year ... by someone willing to work for even less than I was being paid ... Atlantic Flower from Annapolis
A critical issue in the survival of a small business. I am a one woman wholesaling operation. I have struggled with estimating and charging a mark up acceptable to my clients and have worried as to what it would do to my competative pricing. I know I am not in a charity business and my business needs to be financially viable. Your article is encouraging me to not shy away from charging a mark up and is constructive in estimating a fair and reasonable value. I am looking forward to the next part. Thanks Kathryn. Lobat Parsi from Wellington, New Zealand
As a professionalwriter working with most of the biggest publishers in Australia, I've found that editors will actually turn down any added costs for operating expenses such as stationary, phone etc forget about mark-ups. I never had this problem with publications I worked with in the US. Often the editors will say "you can write it off in your taxes" and that it's "their policy." I try to explain that its not the same as getting the money back. They usually say they're hands are tied. It's usually over small amounts $5-$20 so it's not worth losing the fee or causing a fuss. But with rates as low as they are here (and never increasing), those little dribs and drabs could help cut costs. Does anyone have a creative solution to this problem? MB from Sydney
Dear MB,
If you are offering your writing services in the capacity of a freelance consultant, then it is difficult to charge additional costs as there is an expectation that the consultancy fee is all encompassing. My advice is to review your charge rates to ensure that they are sufficient to cover the operating expenses associated with your work.
Another reason why some companies may baulk at markups is the way in which the cost for the job is presented to them. The layout of a quote is often a deciding factor for a lot of clients. If the quote is broken down into recognizable cost categories (eg: concept fee, management fee, administrative costs, contingency) and it falls within your clients’ budget, then they are more likely to accept the costs, knowing that all aspects have been covered.
If the client still quibbles, then a commercial decision is necessary – to work with that client or not. You may choose to accept the job as is and seek to recoup your loss via the next job with that client. This is not always easy as your new price may not be competitive, so best to ensure that you quote correctly the first time around.
Kathryn Williams from Sydney | Read my articles

5 comments | Add your own

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