Anticipation of Fraud in Culinary Business Mark Up Pricing

Hey culinary entrepreneurs, here's something you should know about. Mark up pricing is a pricing method applied in the culinary business world to increase the selling price, then adding the cost of a product. So, with this method, we can determine the initial profit margin on the goods to be sold.

The calculation formula for mark up pricing is quite simple, usually used to cover indirect costs and plan the company's profits or losses. The simple formula is:

Mark up pricing = Budget/Cost of Buying a Product/Service + Mark Up

By applying the mark up pricing trick, your business has set a price that matches the costs and revenue targets. Plus, by integrating the price into the cashier software you use, the price becomes stable and cannot be tampered with by just anyone.

Other Pricing Methods Besides Mark Up Pricing

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You should also know that the mark up pricing method is not only used in pricing, but there are also several other methods that can be grouped into three different approaches. Here's the complete explanation:

Based on Costs

This approach is based on a cost calculation perspective.

• Pricing based on cost-plus

In this method, the selling price of each unit is calculated by adding the total cost of each unit plus a certain amount to cover the desired profit on that unit or margin.

Formula: Selling Price = Total Cost + Margin

• Mark up pricing setting

The selling price per unit is calculated by adding the purchase cost or Cost of Goods Purchased (COGP) per unit with a certain profit margin (mark up).

Formula: Selling Price = COGP + Mark Up

• Setting for Break Even Point (BEP) price

The method of pricing based on Break Even Point (BEP) uses a point where total income equals total costs, so there is no profit or loss.

Formula: Total Overall Cost - Total Overall Receipts

Based on competitor/competitor prices

This pricing method refers to the prices set by competitors as a reference. In practice, this approach is more suitable for standard products in oligopoly market conditions.

In attracting and reaching customers, every company usually uses sales strategies and even in practice, it is often used to outsmart its competitors, for example by setting product prices below market prices with the aim of capturing market share.

Based on demand

This pricing is based on consumer perceptions of price value (perceived value), price sensitivity, and perceived quality.

To find out the value of each quality, you can use PSM (Price Sensitivity Meter) analysis. In this analysis method, consumers will be surveyed about prices for the quality they receive, for example, whether they feel the item they receive is cheap, too cheap, feels expensive, or too expensive.

Tips for Determining Mark Up Pricing

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Beginner entrepreneurs often think, "Mark up is just about adding profit, right?" However, before we decide on mark up pricing, there are some important things to consider.

First is the sales target. This is very important to be used as a reference for how many products must be sold within a period of 1 month or 1 day. This is important to consider in order to know "how long has the product been in the store?"

Then there are operational costs. This includes transportation, communication, and packing costs. These are costs that are very important to calculate so that we can know the total operational costs in every product we produce.

Next is development goals. In the culinary business that we run, surely we want to continue to advance and grow, right? Well, that goal is very important to calculate so that every profit we get can help our culinary business to continue to grow.

Example of Mark Up Pricing

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Prayogo is a businessman who sells tableware with a quantity of 100 pieces. He takes product 1 with a price of Rp100,000 per item. Let's say for the operational costs of the store amount to Rp1,000,000 per month. So how to determine the mark up pricing? Here are the steps that can be followed.

Step 1: Determine the sales target

Let's say every day Prayogo has product 1 as much as 1 piece sold with a total of 10 other items.

Step 2: Determine operational costs

Then the costs that must be incurred in operations are Rp1,000,000 per month, if divided by 30 days then the amount obtained: Rp1,000,000 : 30 = Rp 33,333 per day, you can round it to Rp34,000 per day. Knowing there are 10 items sold per day, then the operational costs of each product are divided by 10:

Rp34,000 : 10 = Rp3,400 per product.

Step 3: Determine the development target

Generally, retailers set the profit margin at least 20% - 30%, some even set it at 50% of the purchase price, depending on the type of goods. But the question is, which percentage is suitable for you to use in your culinary business? Before making a decision, it's a good idea to determine it first! Which percentage is suitable for you to take.

First, if you are in a low-income community environment, you can still make a profit of around 20%. This reason is made because the purchasing power is seen through the location when selling the product.

Second, analyze the prices from competitors, including comparing prices from online stores so that when we do mark up pricing, it is not too excessive.

If assumed using a 20% margin, then the profit of product 1 is Rp100,000 x 20% = Rp20,000. Below is a calculation formula that you can understand in determining the selling price of the product:

Product Selling Price = Purchase Price + Operational Cost Per Product + Development Costs (Mark Up).

Product Selling Price = Rp100,000 + Rp3,400 + Rp20,000 = Rp123,400 per product.

So it can be considered, the mark up pricing in product 1 is at least, mark up pricing for Rp23,400 or the selling price is worth Rp123,400 to minimize potential losses that you will experience.

The example above is included in the minimum mark up value. But, you can also determine a higher mark up pricing value if possible and of course it is suitable for the consumer's purchasing power.

Tips to Avoid Employees Who Illegally Carry Out Mark Up Pricing

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In retail business, mark up pricing is not always applied positively. Sometimes, in other fields such as finance, if mark up pricing is often done incorrectly, it can be troublesome, and even cause problems.

For example, the occurrence of mark up in government budgets. Even ICW (Indonesia Corruption Watch) stated that two types of corruption that occurred throughout 2018 included mark up of funds and misuse of funds. There were at least 76 corruption cases with the modus operandi of mark up in the budget that caused state losses of Rp541 billion.

This case also often occurs in the business world where the perpetrators are dishonest individuals who want to obtain personal profits. They usually do this when preparing product procurement budgets for the company.

Actions like this will certainly cause a lot of losses for the company. Company expenditures will become inefficient, which can lead to less than optimal profits or even financial losses that can eventually lead to business bankruptcy.

Solution for Illegal Mark Up Pricing Fraud with ERP System

So how can you run a culinary business that is safe from illegal mark up pricing carried out by employees? Well, the solution is, you can use ERP (Enterprise Resource Planning) software to manage the system in your company.

ERP is not only related to planning or resources, but the essence of the ERP system is to integrate all parts or departments and functions in a company into one computer system that will accommodate all the more specific needs of each department.

ERP itself is a software that functions to manage and integrate various operational activities in a culinary business. ERP is usually used by large companies, but it is now being implemented in SMEs.

The use of this software in planning company and customer needs through information systems is a very appropriate decision. Because the advantage of ERP is an integrated accounting calculation system automatically.

This system can also facilitate all information about the company to be able to make profitable decisions for the company. So that later it will be able to compete with other companies. All company databases can be integrated, and will make it easier when searching for data.

Moreover, this system can also monitor all the cheating carried out by employees, one of which is mark up pricing that is diverted. Because every data that enters will automatically be integrated directly with the company's bookkeeping or accounting. So, every item in and out along with its price can be monitored directly.