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.
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
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
Want more articles like this? Check out the pricing strategy section.
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.