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CHAPTER 6. MARKUPS ANALYSIS

TABLE OF CONTENTS

6.1 INTRODUCTION ........................................................................................................... 6-1

6.1.1 Distribution Channels...................................................................................................... 6-1

6.2 MARKUP CALCULATION METHODOLOGY........................................................... 6-2

6.2.1 Assumptions..................................................................................................................... 6-3

6.3 APPROACH FOR ORIGINAL EQUIPMENT MANUFACTURER MARKUPS ........ 6-4

6.4 APPROACH FOR MOTOR DISTRIBUTOR MARKUPS ............................................ 6-5

6.5 CONTRACTOR OR INSTALLER MARKUP............................................................... 6-7

6.6 SALES TAXES ............................................................................................................... 6-7

6.7 OVERALL MARKUP..................................................................................................... 6-8

6.8 SHIPPING COSTS .......................................................................................................... 6-9

LIST OF TABLES

Table 6.4-1 Business Expenses Survey Data Used to Calculate Distributor Markups................ 6-6

Table 6.6-1 Average Sales Tax Rates by Census Division and Large State................................ 6-8

Table 6.7.1 Summary of Markups for Three Primary Distribution Channels for Electric 

Motors ...................................................................................................................... 6-9
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CHAPTER 6. MARKUPS ANALYSIS

6.1 INTRODUCTION

This chapter of the technical support document (TSD) presents the U.S. Department of 

Energy’s (DOE's) method for deriving electric motor prices. The objective of the equipment 

price determination is to estimate the price paid by the customer or purchaser for an installed 

electric motor. Purchase price and installation cost are necessary inputs to the life-cycle cost 

(LCC) and payback period (PBP) analyses. Chapter 8 presents the LCC calculations; section 

8.2.1 describes how the LCC uses purchase price and installation cost as inputs.

Purchase prices for electric motors are not generally known. Electric motors are often 

sold as part of a project, sometimes custom-built with unlisted prices. The engineering analysis 

(Chapter 5) provides the manufacturer selling prices (MSPs) for the representative units included 

in the LCC analysis. DOE derived a set of prices, for each electric motor representative unit 

produced by the engineering analysis, by applying markups to the manufacturer selling price in 

the form of markup equations.

6.1.1 Distribution Channels

The appropriate markups for determining the end-user equipment price depend on the 

type of distribution channels through which equipment moves from manufacturers to purchasers. 

At each point in the distribution channel, companies mark up the price of the equipment to cover 

their business costs and profit margin. 

Distribution channels vary depending on the size of the electric motor. Because smaller 

electric motors used as components in larger pieces of equipment constitute the majority of the 

market, much of the market passes through original equipment manufacturers (OEMs) who 

design, assemble, and brand equipment that contain electric motors. OEMs in turn obtain their 

motors either directly from the motor manufacturers or from manufacturers via distributors. In 

larger horsepower ranges (more than 50 horsepower), direct sales to the end-user and sales to 

contractors become more significant.

Based on market research1

and input from interested parties, DOE identified six main 

distribution channels for electric motors and estimated their respective shares of shipments per 

electric motor horsepower range. The six channels are from the manufacturer to: 

(1) OEMs and then to end-users (50 percent of sales); 

(2) distributors to end-users (24 percent of sales); 

(3) distributors to OEM and then to end-users (23 percent of sales); 

(4) contractors and then to end-users (less than one percent of sales); 

(5) distributors to end-users through contractors (less than one percent of sales); and

(6) end-users (less than two percent of sales).
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Other distribution channels exist (e.g., from manufacturer to OEMs, to end-users through 

distributors) but are estimated to account for a minor share of the motor sales (less than one 

percent).

In addition to these distribution chain markups, DOE estimated the shipping costs of the 

motors and added these to the end-user equipment prices. These costs are a significant factor 

because more efficient motors are often larger and heavier than less efficient motors, so this is a 

cost that needs to be included in an accurate cost analysis.

6.2 MARKUP CALCULATION METHODOLOGY

As addressed above, at each point in the distribution channel, companies mark up the 

price of the equipment to cover their business costs and profit margin. In financial statements, 

gross margin is the difference between the company revenue and the company cost of sales or 

cost of goods sold (CGS). Inputs for calculating the gross margin are all corporate costs, 

including: overhead costs (sales, general, and administration), research and development (R&D), 

interest expenses, depreciation, taxes, and profits. For sales of equipment to contribute positively 

to company cash flow, the markup of the equipment must be greater than the corporate gross 

margin. Individual pieces of equipment may command a lower or higher markup, depending on 

their perceived added value and the competition they face from similar equipment in the market.

In developing markups for OEMs and distributors, DOE obtained data about the revenue, 

CGS, and expenses of firms that produce and sell the equipment of interest. DOE determined 

that markups are neither fixed-dollar nor proportional to all direct costs, which means that the 

selling price of a piece of equipment may not be strictly proportional to the purchase price of the 

equipment. Using the available data, DOE has found measurable differences between 

incremental markups on direct equipment costs and the average aggregate markup on direct 

business costs. Additionally, DOE discovered significant differences between average and 

incremental markups for electric motor OEMs and distributors. Section 6.3 and Section 6.4

further discusses the differences between average and incremental markups.

The main reason that the selling price of a piece of equipment may not be strictly 

proportional to the purchase price of the equipment is that businesses incur a wide variety of 

costs. When the purchase price of equipment and materials increases, only a fraction of the 

business expenses increase, while the remainder of the businesses’ expenses stays relatively 

constant. For example, if the unit price of an electric motor increases by 30 percent, it is unlikely 

that the cost of secretarial support in an administrative office will increase by 30 percent also. 

Certain business expenses are uncorrelated with the cost of equipment or cost of goods.

 DOE’s approach categorizes the expenses into two categories: invariant costs (IVC), 

which are those costs that are not expected to vary in proportion to the change in manufacturer 

selling price, and variant costs (VC), which are the costs that scale with the change in 

manufacturer selling price. Together, IVC and VC represent the gross margin. 
6-3

For each step in equipment distribution, DOE estimated both a baseline markup and an 

incremental markup. For electric motors, DOE understands that no increase in distribution labor 

is necessary for the distribution of more-efficient equipment, while the non-labor-scaling cost 

does increase with increasing equipment costs. This allowed DOE to estimate the incremental 

markup given a breakdown of distribution and manufacturing business expenses for a particular 

industry.

6.2.1 Assumptions

DOE derived the OEM and motor distributor markups from three key assumptions about 

the costs associated with motor-related industrial series. DOE used the financial data from the 

2007 U.S. Economic Census’s manufacturing industrial series and 2007 Business Expenses 

Survey to determine OEM and motor distributor markups, respectively. These income statements 

break down the components of all costs incurred by firms that assemble and distribute electric 

motors. The key assumptions used to estimate markups using these financial data are:

1. The firm income statements faithfully represent the various average costs incurred by 

firms designing, assembling, and distributing electric motors.

2. These costs can be divided into two categories: (1) costs that vary in proportion to the 

manufacturer selling price (MSP) of electric motors (variant costs); and (2) costs that do 

not vary with the MSP of electric motors (invariant costs).

3. Overall, OEM and distributor sales prices vary in proportion to OEM and distributor 

costs that are included in the balance sheets.

In support of the first assumption, the income statements itemize firm costs into a number 

of expense categories, including CGS, operating labor and occupancy costs, and other operating 

costs and profit. Although OEMs and motor distributors tend to handle multiple commodity 

lines, the data provide the most accurate available indication of the expenses associated with 

electric motors.

In the following discussion, DOE assumes a division of costs between those that do not 

scale with the manufacturer price (labor and occupancy expenses), and those that do (operating 

expenses and profit). This division of costs led to the estimate of incremental markups addressed 

below. 

In support of the third assumption, the wholesaler industries are relatively competitive, 

and end-user demand for motors and equipment with motors is relatively inelastic—i.e., the 

demand is not expected to decrease significantly with a relatively small increase in price. 

Following standard economic theory, competitive firms facing inelastic demand either set prices 

in line with costs or quickly go out of business.2
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6.3 APPROACH FOR ORIGINAL EQUIPMENT MANUFACTURER MARKUPS

Using the above assumptions, DOE developed baseline and incremental markups for 

OEMs using the firm income statement from several manufacturing industries which design, 

assemble, and brand equipment that contain electric motors. The 2007 Economic Census 

Manufacturing Industry Series reports the payroll (production and total), cost of materials, 

capital expenditures and total value of shipments, and miscellaneous operating costs for 

manufacturers of various types of machinery. DOE collected this data for 25 types of OEMs:

• Farm machinery and equipment manufacturing;

• Construction machinery manufacturing;

• Mining machinery and equipment manufacturing;

• Oil and gas field machinery and equipment manufacturing;

• Sawmill and woodworking machinery manufacturing;

• Plastics and rubber industry machinery manufacturing;

• Paper industry machinery manufacturing;

• Textile machinery manufacturing;

• Printing machinery and equipment manufacturing;

• Food product machinery manufacturing;

• Semiconductor machinery manufacturing;

• Other industrial machinery manufacturing;

• Air-purification equipment manufacturing;

• Industrial and commercial fan and blower manufacturing; 

• Heating equipment (except warm air furnaces) manufacturing;

• Air conditioning and warm-air heating and commercial/industrial refrigeration

equipment manufacturing;

• Machine-tool (metal cutting types) manufacturing;

• Machine-tool (metal forming types) manufacturing;

• Rolling mill machinery and equipment manufacturing;

• Pump and pumping equipment manufacturing;

• Air and gas compressor manufacturing;

• Elevator and moving stairway manufacturing;

• Conveyor and conveying equipment manufacturing;

• Packaging machinery manufacturing; and

• Fluid-power pump and motor manufacturing.

DOE used the baseline markups, which cover all of the OEM’s costs (both variant and 

invariant costs), to determine the sales price of baseline models. Variant costs were defined as 

costs that vary in proportion to the change in MSP induced by increased efficiency standards; in 

contrast, invariant costs were defined as costs that do not vary in proportion to the change in 

MSP due to increased efficiency standards. The baseline markup relates the MSP to the OEM 

selling price. For each of the 25 OEMs identified above, DOE calculated the OEM baseline 

markup as follows:
6-5

MUBASE PAY MAT CAP

SALES = + +

Where:

SALES = value of shipments,

PAY = payroll expenses, 

MAT = material input expenses,

CAP = capital expenses,

MUBASE = baseline markup.

The baseline markups range between 1.32 (machine-tool manufacturing) and 1.63 

(semiconductor machinery manufacturing), with the sales-weighted average of 1.44.

Incremental markups are coefficients that relate the change in the MSP of more energyefficient models, or that equipment that meets the requirements of new energy conservation 

standards, to the change in the OEM selling price. Incremental markups cover only those costs 

that scale with a change in the manufacturer’s sales price (VC). It calculated the incremental 

markup (MUINCR) for each of the 25 OEMs using the following equation:

OEM

OEM OEM

INCR CGS

CGS VC

MU

+ =

Where:

MUINCR = incremental OEM markup,

CGSOEM = OEM’s cost of goods sold, and

VCOEM = OEM’s variant costs.

The incremental markups range between 1.27 (machine-tool manufacturing) and 1.56

(pump and pumping equipment manufacturing), with the sales-weighted average of 1.39.

6.4 APPROACH FOR MOTOR DISTRIBUTOR MARKUPS 

The type of financial data used to estimate markups for OEMs is also available for 

distributors. DOE based its distributor markups on financial data from the 2007 U.S. Census 

Business Expenses Survey (BES). DOE organized the financial data into income statements that 

break down cost components incurred by firms that sell equipment with electric motors or 

replacement motors, “Electrical Goods Merchant Wholesalers” (NAICS 4236).a

Using the above assumptions, DOE developed baseline and incremental markups and 

applied them in calculating end-user equipment prices from manufacturer sales prices. The BES 

 a The distributors to whom these financial data refer handle multiple commodity lines.
6-6

provides gross margin (GM) as percent of sales for the electrical goods merchant wholesalers 

industry; therefore, baseline markups can be derived with the following equation:

(%) (%)

(%) MUBASE Sales GMSales

− =

DOE used financial data from the BES for the categories “Electrical Goods Merchant 

Wholesalers” to calculate incremental markups used by wholesalers of motors. Incremental 

markups are coefficients that relate the change in the MSP of higher-efficiency models to the 

change in the wholesaler selling price. Hence, incremental markups cover only those costs that 

scale with a change in the manufacturer’s sales price (i.e., VC). DOE considers higher-efficiency 

models to be equipment sold under market conditions with new efficiency standards. It 

calculated the incremental markup (MUINCR) for distributors using the following equation:

DISTRIBUTOR

DISTRIBUTOR DISTRIBUTOR

INCR CGS

CGS VC MU + =

Where:

MUINCR = incremental wholesaler markup,

CGSDISTRIBUTOR = distributor’s cost of goods sold, and

VCDISTRIBUTOR = distributor’s variant costs.

Table 6.4-1 shows the data from the BES and the markups DOE estimated using the 

procedures described above.

Table 6.4-1 Business Expenses Survey Data Used to Calculate Distributor Markups

Items Amount ($1,000,000)

Sales 348,960 

Cost of goods sold (CGS) 258,579 

Gross Margin 90,381 

Total Operating Expenses 55,785 

Labor & Occupancy Expenses Amount ($1,000,000)

Annual payroll 26,785 

Employer costs for fringe benefit 5,008 

Contract labor costs including temporary help 894 

Purchased utilities, total 628 

Cost of purchased repair and maintenance services 691 

Cost of purchased management consulting administrative services and other 

professional services 1,863 

Purchased communication services 790 

Lease and rental payments 2,164 

Taxes and license fees (mostly income taxes) 707 
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Other Operating Expenses & Profit Amount ($1,000,000)

Expensed computer related supplies 335 

Cost of purchased packaging and containers 335 

Other materials and supplies not for resale 644 

Lease and rental payments for machinery and equipment 347 

Cost of purchased transportation, shipping and warehousing services 2,486 

Cost of purchased advertising and promotional services 1,890 

Expense purchases of software 353 

Cost of data processing and other purchased computer services, except 

communications 268 

Depreciation and amortization charges 2,170 

Commissions paid 1,444 

Other Operating Expenses 6,004 

Net profit before taxes 34,575 

Baseline Markup=(CGS+GM)/CGS 1.350

Incremental Markup=(CGS+Total Other Operating Expenses and Profit)/CGS 1.197

Source: 2007 Business Expenses Survey, Electrical Goods Merchant Wholesalers (NAICS 4236)

6.5 CONTRACTOR OR INSTALLER MARKUP

DOE used information from RSMeans Electrical Cost Data3 to estimate markups used by 

contractors in the installation of equipment with small motors or replacement motors. RSMeans 

Electrical Cost Data estimates material expense markups for electrical contractors as 10 percent, 

leading to a markup factor of 1.10. DOE recognizes that contractors are not used in all 

installations, as some firms have in-house technicians who would install equipment or replace a 

motor. However, DOE has no information on the extent to which this occurs, so it applied a 

markup of 1.10 in all cases.

6.6 SALES TAXES

The sales tax represents state and local sales taxes that are applied to the end-user 

equipment price of the equipment. The sales tax is a multiplicative factor that increases the enduser equipment price.

DOE derived state and local taxes from data provided by the Sales Tax Clearinghouse.4

 

These data represent weighted averages that include county and city rates. DOE then derived 

population-weighted average tax values for each Census division and large state, as shown in 

Table 6.6-1 below. This provides a national average tax rate of 7.12 percent, which DOE used

for each of the distribution channels.
6-8

Table 6.6-1 Average Sales Tax Rates by Census Division and Large State

Census Division/State 2011 Population Tax Rate (2011) %

New England 14,492,360 5.64

Middle Atlantic 21,564,041 6.62

East North Central 46,519,084 6.85

West North Central 20,639,751 7.15

South Atlantic 41,167,090 6.27

East South Central 18,553,961 7.93

West South Central 

11,304,323 

8.47

Mountain 22,373,411 6.80

Pacific 

12,799,425 

5.24

New York 

19,465,197 

8.45

California 37,691,912 8.20

Texas 25,674,681 8.00

Florida 

19,057,542 

6.65

Population Weighted Average 7.12

6.7 OVERALL MARKUP

The overall markup for each distribution channel is the product of the relevant markups, 

as well as the sales tax. DOE used the overall baseline markup to estimate the end-user 

equipment price of baseline models, given the MSP of the baseline models. As stated above, 

DOE considers baseline models to be equipment sold under existing market conditions (i.e., 

without new energy efficiency standards). 

DOE used the overall incremental markup to estimate changes in the end-user equipment 

price, given changes in the manufacturer cost above the baseline model cost resulting from a 

standard to raise equipment efficiency. The total end-user equipment price for higher-efficiency 

models is composed of two components: the end-user equipment price of the baseline model and 

the change in end-user equipment price associated with the increase in manufacturer cost to meet 

the new efficiency standard. The following equation shows how DOE used the overall 

incremental markup to determine the end-user equipment price for higher-efficiency models (i.e., 

models meeting new efficiency standards). 

( )

BASE MFG OVERALL INCR

STD MFG OVERALL BASE MFG INCR SALES

EQP COST MU

EQP MSP MU MSP MU Tax

_

_

= + ∆ ×

= × + ∆ × ×

Where:
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EQPSTD = end-user equipment price for models meeting new efficiency 

standards,

EQPBASE = end-user equipment price for baseline models, 

MSPMFG = manufacturer selling price for baseline models,

ΔMSPMFG = change in manufacturer selling price for higher-efficiency models,

MUINCR = incremental OEM or distributor markup,

TaxSALES = sales tax,

MUOVERALL_BASE = baseline overall markup (product of manufacturer markup, baseline 

OEM or distributor markup, and sales tax), and

MUOVERALL_INCR = incremental overall markup (product of manufacturer markup, 

incremental OEM or distributor markup, and sales tax).

Table 6.7.1 summarizes the markups and the overall baseline and incremental markups 

for each of the three main identified channels. Weighting the values by the respective shares of 

each channel yields an average overall baseline markup of 1.63 and an overall incremental 

markup of 1.50.

Table 6.7.1 Summary of Markups for Three Primary Distribution Channels for Electric 

Motors

Markup

OEM to End-User 

(50%)

Distributor to End-User 

(24%)

Distributor to OEM to 

End-User (23 %)

Baseline Incremental Baseline Incremental Baseline Incremental

Distributor - - 1.35 1.20 1.35 1.20

OEM 1.44 1.39 - - 1.44 1.39

Contractor/Installer - - - - - -

Sales Tax 1.0712 1.0712 1.0712 1.0712 1.0712 1.0712

Overall 1.54 1.49 1.45 1.29 2.08 1.79

6.8 SHIPPING COSTS

DOE examined freight shipping costs to evaluate the impact of increased motor weight 

on installed cost. DOE collected quoted shipping costs from 16 freight shipment companies for 

single shipments by “less than truckload” (LTL) ground service weighing between 50 and 2,600 

pounds and over shipping distances between 350 and 3,000 miles. Marginal shipment costs per 

pound varied from 7.1 cents to $1.44, depending on the total weight, distance shipped, and 

guaranteed delivery times. DOE used a median marginal shipment cost of 65 cents per pound. 
6-10

REFERENCES

 1 Arthur D. Little, Inc. (1980), Classification and Evaluation of Electric Motors and Pumps. 

Report DOE/TIC-11339. Prepared for the US. Department of Energy, Office of Industrial 

Programs. Sprindfield, Va.: National Technical Information Service.

2 Pindyck, R.S. and D.L. Rubinfeld. (2000), Microeconomics, 5th ed., New Jersey: Prentice 

Hall.

3

 RSMeans Construction Publishers & Consultants. (2010), Electrical Cost Data, 33st Annual 

Edition. 2010. ed. J.H. Chiang, Kingston, MA.

4

 Sales Tax Clearinghouse, Inc. (last access on April 24, 2011), State sales tax rates along with 

combined average city and county rates, http://thestc.com/STrates.stm