After watching this video lesson, you will become familiar with how stores price their products to make a profit. Learn about how they increase their prices, markup, and how they decrease their prices, markdown.

## A T-Shirt Business

Shalon has a t-shirt business where she sells her own line of designer shirts. She is in it for the money. But in order to make money from selling her t-shirts, she needs to make sure her prices are at the right price point both in terms of making money and giving her customers a good deal. What she needs to balance is her **markup**, how much to increase her prices, and her **markdown**, how much to decrease prices.

## Markup

To calculate her markup, Shalon needs to take into consideration things like the cost of her time spent designing the shirts, the cost to manufacture the shirt, and the cost of keeping the store open. After all these costs are calculated, then she needs to figure out how much more she needs to add so she can make a good living from her t-shirt business.Say, for instance, after considering all the factors we mentioned, that the total cost to make each shirt for Shalon is $10. Of course, Shalon wants to make a profit from selling each shirt, so she marks up her shirt price to $30. How much of a markup is this? Let’s calculate it. $30 is $20 more than $10.

So dividing $20 by $10, we get 20/10 = 2. Changing this into a percentage, we see that Shalon has a markup of 200%.Shalon wants to make sure she is competitive with other t-shirt businesses in town, so she does some investigating of her own.

She visits another shop and she finds that this shop has a markup of 100%. If the manufacturing cost of the product is $10, how much is this shop selling the shirts for?We can calculate this by multiplying the $10 with the 100% to find how much our increase is. Changing the 100% to a decimal, we get 1 for our decimal. Multiplying the 10 with the 1, we find that this shop has increased their prices by $10 per shirt.

So the shirts here cost $10 + $10 = $20.Hmm, Shalon is thinking that her prices might be a bit steep for the customers in the neighborhood based on her investigations.

## Markdown

Now she is considering how much to mark down her prices. Her starting price is $30. If she wants to decrease her prices to $20, how much of a markdown does she need? To calculate this, we first see how much of a difference we have. We have a difference of $30 – $20 = $10.

So, the markdown is $10/$30 = 0.3333 or roughly 33%.Shalon can do this two ways. She can either offer a 33% off coupon to all her customers or she can decrease her prices without offering coupons.

Even if she sells a shirt for $20, she is still making profit.What if Shalon wanted to calculate the shirt price based on a percentage markdown? What if she wanted to only mark down her prices by 20%? How much would her shirts cost then? Let’s see. We multiply her starting price of $30 with 20% or 0.

2 to find how much our decrease is. We get $30 * 0.2 = $6. So, the shirt price with a markdown of 20% will be $30 – $6 = $24.

## Special Event Pricing

Shalon was just informed that there is going to be a special event, the grand opening of a skateboard park, in just a few weeks. To help with the celebration, Shalon has created a special limited edition of t-shirts just for the event. Her cost to produce each shirt is $12.

She has a markup of 150% and she is offering coupons that give a markdown of 40%. How much is each shirt selling for?With a 150% markup, the additional cost per shirt is $12 * 1.5 = $18. So the cost of the shirt after the markup is $12 + $18 = $30. A markdown of 40% decreases the price of the shirt by $30 * 0.4 = $12.

So the final cost of the shirt is $30 – $12 = $18. Shalon is happy with this price, so she starts to pass out 40% off coupons for the event.

## Lesson Summary

Let’s review what we’ve learned:**Markup** is how much to increase prices and **markdown** is how much to decrease prices. To calculate markup, we need to find out how much more our prices are than the cost to produce the item. Then we find the markup percentage by dividing the difference by the cost to produce them.

If we are given a markup percentage, we multiply the percentage with the cost to produce the item. Then we add this increase to the cost to produce the item to find the final cost.To calculate markdown, we find the difference between the beginning price and the decreased price, then we find the percentage by dividing the difference by the beginning price. If we are given a markdown percentage, we multiply the percentage with the original price to find how much of a decrease we are getting, then we subtract this difference from the original price to find the marked down price.

## Learning Outcomes

This video lesson aims to prepare you to do the following:

- Understand the concepts of markups and markdowns in sales
- Calculate a markup, markdown amount or percentage