If you’ve ever purchased popcorn from a movie theater, you’ve probably balked at the outrageous prices. A medium popcorn for $7.99 seems ridiculous when you could walk into any grocery store and purchase the same popcorn for a fraction of the price. Despite this, AMC theaters sell 52 million bags of popcorn each year. So why is that popcorn so expensive, and how do theaters get away with sky-high prices?
A product markup is the amount a business sells its product for, relative to the cost required to manufacture that product. Take movie popcorn as an example. It’s not exactly an expensive product for theaters to make. Let’s say it costs the theater $0.99 to pop enough popcorn to fill a medium container. After it’s popped, the theater sells that medium popcorn for $7.99. The markup on the popcorn is 788%. We’ll cover how theaters can get away with this markup (and why consumers are willing to pay for those markups) later on in the article.
7 Marked-Up Products You Buy All The Time
From electronics to clothing, consumers buy marked-up products every day. Check out the products below to find out exactly what you’re paying for and how companies use markups to fund business operations.
Despite all the bells and whistles on the latest iPhone, it isn’t a very pricey item to create. It takes just under $500 to manufacture an iPhone – from the cost of each component to the labor involved, manufacturing costs for a single iPhone are less than half of what Apple sells them for.
The largest markup on an iPhone model occurred with the iPhone 3G, which entered the market on July 11, 2008. There are two factors at play when it comes to this spike in the markup:
- Cost of production – There were very few structural differences between the original iPhone and the 3G model (though the App Store was introduced in this update), leaving the overall manufacturing cost relatively unchanged for Apple.
- Consumer demand – The original iPhone sold 300,000 units in the first weekend, but the 3G version sold over one million in the first weekend. This sharp increase in demand left Apple free to raise their price.
The markup on your iPhone is well over 100%, which may sound high to the average consumer’s wallet. However, the profits earned from those markups give Apple the opportunity to invest in the next great product launch while funding research and development for the futures of the products we love.
While your wallet may protest, there is actually a good reason why theaters bump the price of popcorn and other concessions. According to Stanford research, these prices may even benefit movie-goers in the long run. Movie theaters operate on a business model that relies on a loss leader (a good or service that gets customers in the door, but doesn’t provide significant profit for a company) to profit. For theaters, the loss leader is movie tickets.
Film distributors take approximately 70% of the cut from theaters for all tickets sold. With such a small percentage of profit coming from ticket sales, theaters have to make the bulk of their money in other areas, like concessions. As a result, concessions are the bread and butter of movie theaters and bring in the most revenue.
Take Cinemark Theaters as an example. In 2018, Cinemark sold $1.8 billion in tickets at a cost of $1 billion after distributor fees – that’s a profit margin of around 44%. By contrast, Cinemark sold $1.1 billion in concessions at a cost of $181 million – a profit margin of nearly 84%!
There are usually two schools of thought when it comes to denim: you either prefer the cheapest pair you can find at Walmart, or you buy designer jeans with nothing less than the best quality. You’ll find plenty of debate as to which strategy is best, but the reality is that some denim brands (from the most budget-friendly to the top designers) use the same fabric sources and mills to produce their jeans.
Designers mark their clothing up significantly, sometimes over 500% more than what a cheaper brand might charge. This markup is largely the result of a strong brand name, for which consumers are willing to pay more.
Another cause of these designer prices is the cost of labor to produce jeans. The denim industry has come under fire on multiple occasions for poor working conditions, disregard for environmentally conscious practices, and a general lack of care for employee wellbeing. However, many designers are working towards more ethical labor and manufacturing practices, which aren’t always cheap to implement.
Diamonds are a girl’s best friend, but it’s no secret that they’re costly. With the rise of online shopping and e-commerce sites, finding the perfect diamond has gotten much easier. Brands like Blue Nile, Brilliant Earth, and Ritani offer loose diamonds, engagement rings, and custom jewelry at the click of a button – and business is booming.
We looked at the current best-selling loose diamond from Blue Nile – the diamond at the top of the list came in at $1,642. Blue Nile offers plenty of financing options, but the reality is that this little rock is overpriced. Would you be surprised to know that it might cost as little as $146 for diamond companies to produce a single stone?
Despite beliefs that diamonds are rare, they’re actually more common than emeralds, rubies, sapphires, and plenty of other precious stones. However, the price difference is stark: a one-carat diamond averages $7,000, compared to $100–$1,000 per carat for one of these other gems.
So what’s with the huge difference in price? While the history of the diamond industry is worth looking into, the long story cut short is this: there is an oligopoly on the diamond supply, with just five companies controlling the majority of diamond mines (about 72%) around the world. The companies in this oligopoly can set prices as high as they like with few repercussions – the result is an overpriced gem that is marketed heavily as a purchase of great importance.
Markup Comparisons: Getting The Most Bang For Your Buck
When it comes to markups, the differences in price aren’t always from the cost of manufacturing to the retail price. We examined the price differences between brand name products and their generic alternatives. These are the products you buy all the time, so get ready to wince at the markups you’re shelling out cash for.
Printer ink has been named one of the most expensive liquids in the world. While this simple product might be something you buy every few months, the markup on brand name printer ink is worth noting.
There is a method to the madness when it comes to the price of printers and their ink refills. In fact, similar to our movie theater popcorn example, many printer manufacturers may not make much money on printers at all – it’s the refill cartridges that sustain their profits.
Brands like HP Inkjet offer cheap printers that consumers see as a great deal, especially when compared to the fancier models on the market. But even if that printer is cheap, ink refills could set you back $150 annually. Fortunately, there are plenty of third-party ink vendors who offer usable ink refills for pennies on the dollar, especially when compared to branded versions.
Here’s a markup you might be paying for every morning. That daily coffee could be marked up 2,900% or more! You probably knew that your daily Starbucks habit doesn’t come cheap, but this markup might make you think twice the next time you head to the coffee shop.
For those hoping to save money, make coffee at home. Even with a high-quality coffee maker, great coffee beans, and a fancy mug, you’ll spend less than you would at Starbucks over time. With caffeine cravers spending well over $2,000 a year on Starbucks purchases alone, your wallet will thank you for making this switch.
Did you know that big brands like Tylenol and their generic counterparts have identical active ingredients? Actually, generic medicines are the same as brand-name medicines when it comes to quality, dosage, strength, and method of administration. The one big difference: price.
We looked to Walmart to compare two OTC medicines: Tylenol Extra Strength and a generic brand, Equate. Here’s the breakdown:
- Tylenol Extra Strength: $9.47
- Contents: 100 caplets, 500mg each
- Active ingredient: Acetaminophen
- Dosage: 2 caplets every 6 hours
- Equate Extra Strength: $4.92
- Contents: 100 caplets, 500mg each
- Active ingredient: Acetaminophen
- Dosage: 2 caplets every 6 hours
Equate matches Tylenol pound for pound, but is half the price – so why do branded drugs account for half of all daytime headache medication sales by dollar value and 60% of the overall market share?
According to research, it comes down to the education of consumers. A study done by the University of Chicago asked 80,000 shoppers to name the active ingredient in five top pain relievers: Advil, Aleve, Bayer, Excedrin, and Tylenol. Around 61% of respondents got the right answer for all five brands. More specifically:
- Those who got all five correct bought 80% of their OTC medications in generic versions.
- Pharmacists bought 90% of their OTC medications in generic versions.
- Those who couldn’t name any correctly bought less than 60% generic.
If saving money is on your to-do’s, go for generic when it comes to over-the-counter pain reliever. Brands like Tylenol and Excedrin mark up their products because of their names, but have the same ingredients in their products as the generic versions.
Product Markups: A Company’s Perspective
While consumers may not love the idea of a big markup on most products, they do serve a purpose for the companies who create them. Check out the infographic below to find out how brands use markups to fund their projects.
While these markups may have you worried about spending too much money on overpriced items, there are plenty of ways to be sure you’re getting what you pay for when you shop – especially if you do your shopping online. Do your research on generic versions and third-party vendors to find the most budget-friendly options and always use discount codes when they’re available.
WalletHub | Consumer Reports 1, 2 | Walmart 1, 2 | Business Insider 1, 2 | High Snobiety | Budget Fashionista | Investopedia | QuickBooks | Cinemark Holdings | The Hustle | BizFluent | Virtue and Vice | The Motley Fool | Forbes | Digital Trends | Mashable