CHAPTER 6. MARKUPS TO DETERMINE PRODUCT PRICE
 

TABLE OF CONTENTS
 

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

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

6.1.2 Markup Calculation Procedure ........................................................................................ 6-3
 

6.1.2.1 Approach for Manufacturer Markup.............................................................. 6-3
 

6.1.2.2 Approach for Retailer and Distributor Markups............................................ 6-4
 

6.1.2.3 Approach for Contractor Markup .................................................................. 6-5
 

6.1.2.4 Approach for Builder Markup ....................................................................... 6-6
 

6.1.2.5 Overall Markups ............................................................................................ 6-7
 

6.2 MANUFACTURER MARKUP ...................................................................................... 6-8
 

6.3 RETAILER MARKUP .................................................................................................... 6-8
 

6.4 DISTRIBUTOR MARKUP............................................................................................. 6-8
 

6.5 CONTRACTOR MARKUP ............................................................................................ 6-9
 

6.6 BUILDER MARKUP .................................................................................................... 6-10
 

6.7 SALES TAX .................................................................................................................. 6-10
 

6.8 SUMMARY OF MARKUPS ........................................................................................ 6-11
 

6.8.2 Validation of Estimated Markups for Water Heaters .................................................... 6-13
 

6.8.3 Application of Markups ................................................................................................. 6-14
 

LIST OF TABLES 

Table 6.3.1 Data Used to Calculate Retailer Markup ............................................................. 6-8
 

Table 6.4.1 Data Used to Calculate Distributor Markup ........................................................ 6-9
 

Table 6.7.1 Average Sales Tax Rates by Census Division and Large State ......................... 6-11
 

Table 6.7.2 Weighted-Average Sales Tax Rates by Product ................................................ 6-11
 

Table 6.8.1 Markups for Water Heaters, Replacement Applications ................................... 6-12
 

Table 6.8.2 Markups for Water Heaters, New Home Applications...................................... 6-12
 

Table 6.8.3 Markups for Direct Heating Equipment and Pool Heaters, Replacement
 

Applications ....................................................................................................... 6-12
 

Table 6.8.4 Markups for Direct Heating Equipment and Pool Heaters, New Home
 

Applications ....................................................................................................... 6-13
 

Table 6.8.5 Water Heater Manufacturer and Retail Markup Validation .............................. 6-13
 

Table 6.8.6 Weighted-Average Overall Markups for Water Heaters ................................... 6-15
 

Table 6.8.7 Weighted-Average Overall Markup for Pool Heaters and Direct Heating
 

Equipment.......................................................................................................... 6-16
 

LIST OF FIGURES 

Figure 6.1.1 Distribution Channels for Residential Water Heaters.......................................... 6-2
 

Figure 6.1.2 Distribution Channels for Direct Heating Equipment ......................................... 6-2
 

Figure 6.1.3 Distribution Channels for Pool Heaters ............................................................... 6-3
 

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CHAPTER 6. MARKUPS TO DETERMINE PRODUCT PRICE
 

6.1 INTRODUCTION
 

To carry out the engineering and life-cycle cost (LCC) analyses, DOE needed to 

determine the price to the consumer of a baseline product and the price of more efficient units. 

By applying a multiplier called a “markup” to the manufacturer product costs estimated in the 

engineering analysis, DOE estimated the consumer price for baseline models and more efficient 

products. 

6.1.1 Distribution Channels 

The appropriate markups for determining the consumer product price depend on the type 

of distribution channel through which products move from manufacturers to purchasers. At each 

point in the distribution channel, companies mark up the price of the product to cover their 

business costs and profit margin. 

For water heaters, the distribution channel differs for replacement and new home 

applications. For replacement applications, manufacturers sell to either plumbing distributors or 

large retail outlets (typically large home-supply stores).a Two possible paths follow: (1) a retail 

outlet sells a water heater to the customer, who either hires someone to install it or self-installs 

it;b or (2) a plumbing distributor sells a water heater to a contractor, who then sells it to a 

consumer and installs it. For storage-type water heaters, estimates of water heater distribution 

channels from DOE’s 2001 water heater technical support document (TSD)1 indicate that the 

retail channel accounted for 60 percent of all replacement applications. While this share is likely 

higher today, DOE used this value since no more recent data was available. For instantaneous 

water heaters, DOE relied on available information, which suggests that most sales go through 

plumbing distributors and contractors rather than retail outlets. 

In most new home applications, the water heater is part of the overall plumbing package 

installed by a plumbing contractor or, in the case of large building companies, by its own master 

plumber and crew. A plumbing contractor usually purchases the water heater from a plumbing 

distributor, and in this case DOE believes it is appropriate to include a contractor markup. 

According to the 2002 U.S. Economic Census (Construction Industry Series),2, 3 builders with 

annual revenue of more than $10 million accounted for half of the value of new residential 

single-family construction. DOE believes that these builders are large enough to have a master 

plumber and not hire a contractor, and assigned half of water heater shipments to new 

construction to this channel (New Homes A in the figure below). 

a Manufacturer representatives facilitate sales from manufacturers to both distributors and retailers, but they work on 

commission and thus DOE does not include them for purposes of estimating markups. 

b In some cases (e.g., Sears), the retail outlet provides installation as part of a package. In others, the retail outlet 

links the customer to a contractor for installation. Self-installation is likely more common for electric than for gas 

water heaters due to the greater complexity of replacing a gas unit. 

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Based on the above description, DOE defined four distribution channels for the purposes 

of estimating markups for water heaters, as shown in Figure 6.1.1. 

Replacement A: 

Replacement B: 

Manufacturer Retailer Consumer 

Manufacturer Distributor Contractor Consumer 

New Homes A: Manufacturer Distributor Builder Consumer 

New Homes B: Manufacturer Distributor Contractor Builder Consumer 

Figure 6.1.1 Distribution Channels for Residential Water Heaters 

For direct heating equipment, consumer purchases and installations do not play a 

significant role in the established distribution channels. To determine distribution channels for 

direct heating equipment, DOE used the approach outlined in the Residential Furnace 2007 

TSD.4 For replacement applications, most sales go through distributors to contractors, and then 

to consumers. In new home applications, most sales go through distributors to contractors hired 

by the builder. Thus, DOE defined two distribution channels for the purposes of estimating 

markups for direct heating equipment, as shown in Figure 6.1.2. 

Replacement: Manufacturer Distributor Contractor Consumer 

New Homes: Manufacturer Distributor Contractor Builder Consumer 

Figure 6.1.2 Distribution Channels for Direct Heating Equipment 

To determine distribution channels for pool heaters, DOE used information from a 

consultant report.5 For replacement applications, most sales go through distributors or retailers to 

pool service companies. In most new home applications, the pool builder purchases the product 

from a distributor or wholesaler, and there is no contractor involved. Thus, DOE defined two 

distribution channels for the purposes of estimating markups for pool heaters, as shown in Figure 

6.1.3. 

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Replacement: Service 

Company Manufacturer Distributor Consumer 

New Homes: Manufacturer Distributor Pool Builder Consumer 

Figure 6.1.3 Distribution Channels for Pool Heaters 

6.1.2 Markup Calculation Procedure 

Companies mark up the price of product 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) and interest expenses; depreciation, and taxes—and profits. In order for 

sales of a product to contribute positively to company cash flow, the product’s markup must be 

greater than the corporate gross margin. Individual products may command a lower or higher 

markup, depending on their perceived added value and the competition they face from similar 

products in the market. 

In developing markups for the different actors in the distribution chains, DOE obtained 

data about the revenue, CGS, and expenses of firms that produce and sell the products of interest. 

DOE’s approach categorizes the expenses into two categories: labor-scaling costs (LSC), which 

are fixed labor and occupancy expenses that increase in proportion to the amount of labor 

required to produce or sell the product, and non-labor-scaling costs (NLSC), which are variable 

operating costs that do not scale with labor and vary in proportion to CGS. Together, LSC and 

NLSC represent the gross margin. 

6.1.2.1 Approach for Manufacturer Markup 

DOE uses manufacturer markups to transform a manufacturer’s product costs into a 

manufacturer sales price. Using the CGS and gross margin, the manufacturer markup can be 

calculated as follows: 

MU MFG =

MFG 

MFG MFG 

CGS 

CGS + GM 

Where: 

MUMFG = Manufacturer markup, 

CGSMFG = Manufacturer cost of goods sold, and 

GMMFG = Manufacturer gross margin. 

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6.1.2.2 Approach for Retailer and Distributor Markups 

DOE based the retailer and distributor markups on financial data from the U.S. Census 

Business Expenses Survey.6 DOE organized the financial data into balance sheets that break 

down cost components incurred by firms that sell the products.c The key assumptions that DOE 

made to estimate the retailer and distributor markups using these financial data were: 

1.	 The balance sheets faithfully represent the various average costs incurred by firms selling 

home appliances. 

2.	 These costs can be divided into two categories: 

a.	 Costs that vary in proportion to the manufacturer sales price (variable costs); and 

b.	 Costs that do not vary with the manufacturer sales price (fixed costs). 

3.	 Retailer and distributor sales prices vary in proportion to retailer and distributor costs that 

are included in the balance sheets. 

In support of the first assumption, the balance sheets itemize firm costs into a number of 

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

costs and profit. Although retailers and distributors tend to handle multiple commodity lines, the 

data provide the most accurate available indication of home appliance expenses. 

Information obtained from the trade literature pertaining to the heating, ventilation, and 

air-conditioning (HVAC) contracting industry tends to support the second assumption. This 

information indicates that retailer and distributor markups should vary according to the quantity 

of labor and materials used to sell or distribute the product, with markups on labor tending to be 

much larger than markups on materials.7 This information also describes markups as varying 

much more in relation to sales volume than in relation to other factors, including appliance 

energy efficiency. This last finding strongly suggests that labor inputs vary more with sales 

volume than with appliance cost or energy efficiency. In the discussion that follows, DOE uses a 

division of costs between those that do not scale with the manufacturer sales price (fixed costs— 

labor and occupancy expenses referred to above as LSC), and those that do (variable costs— 

operating expenses and profit referred to above as NLSC). 

In support of the third assumption, the retailer and distributor industries are relatively 

competitive, and consumer demand for residential home appliances is relatively inelastic, i.e. the 

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

large number of household appliance stores and merchant wholesalers of service equipment (i.e., 

distributors of products including heating products) listed by the U.S. Census Bureau in its 

Statistics of U.S. Businesses indicates the competitive nature of the market.8 For example, there 

are more than 10,000 household appliance store establishments and over 5,000 merchant 

c The retailers and distributors to whom these financial data refer handle multiple commodity lines. 

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wholesaler establishments of service equipment in the U.S.d Following standard economic 

theory, competitive firms facing inelastic demand either set prices in line with costs or quickly 

go out of business.9 

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

retailers and distributors. DOE used the baseline markups, which cover all of a retailer’s or 

distributor’s costs (both LSC and NLSC), to determine the sales price of baseline models. The 

baseline markup relates the manufacturer sales price to the retailer or distributor sales price. 

DOE calculated the baseline markup for retailers and distributors using the following equation: 

CGS + GM CGS + (LSC + NLSC ) MU RTL / DIST RTL / DIST RTL / DIST RTL / DIST RTL / DIST 

BASE = = CGS CGS RTL / DIST RTL / DIST 

Where: 

MUBASE = Baseline retailer or distributor markup,
 

CGSRTL/DIST = Retailer or distributor cost of goods sold,
 

GMRTL/DIST = Retailer or distributor gross margin,
 

LSCRTL/DIST = Retailer or distributor labor-scaling costs, and
 

NLSCRTL/DIST = Retailer or distributor non-labor-scaling costs.
 

Incremental markups are coefficients that relate the change in the manufacturer sales 

price of higher energy efficient models to the change in the retailer or distributor sales price. 

Incremental markups cover only those costs that scale with a change in the manufacturer’s sales 

price (NLSC). DOE considers higher energy efficient models to be products that meet the 

requirements of new energy conservation standards. It calculated the incremental markup 

(MUINCR) for retailers and distributors using the following equation: 

CGS + NLSC MU RTL / DIST RTL / DIST 

INCR = CGS RTL / DIST 

Where: 

MUINCR = Incremental retailer or distributor markup,
 

CGSRTL/DIST = Retailer or distributor cost of goods sold, and
 

NLSCRTL/DIST = Retailer or distributor non-labor-scaling costs.
 

6.1.2.3 Approach for Contractor Markup 

The type of financial data used for estimating markups for retailers and distributors is not 

available for contractors. To estimate contractor markups for direct heating equipment and pool 

heaters, DOE used cost data from a financial analysis of the HVAC industry conducted by the 

d DOE determined the number of establishments for household appliance stores based on the following North 

American Industry Classification System (NAICS) code and description: 443111, Household Appliance Stores. 

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Air-Conditioning Contractors of America (ACCA).10 ACCA reports gross margin as a percent of 

sales, so the baseline markup can be estimated using the following equation: 

1 MU BASE = 1− GM CTR
 

Where:
 

MUBASE = Baseline contractor markup and
 

GMCTR = Contractor gross margin.
 

The data from the HVAC industry may not be appropriate for plumbing contractors. 

Therefore, DOE estimated contractor markup for water heaters using the value given in RS 

Means11 for contractor markup on mechanical equipment. 

Neither of the above data sources provides sufficient detail to allow estimation of 

incremental markups, so DOE used the baseline markup for the incremental markup as well. 

6.1.2.4 Approach for Builder Markup 

To develop a builder markup, DOE collected data on new single-family housing 

construction (NAICS 236116) from the 2002 Economic Census Geographic Area Series 

Construction.12 The census data include the number of establishments, payroll, value of 

construction, cost of materials, and cost of subcontracted work for each state. DOE calculated the 

baseline markup for builders using the following equation: 

VCONSTRUCT MU BASE = Pay + MatCost + SubCost 

Where: 

MU BASE = Baseline builder markup,
 

V = Value of construction,
 CONSTRUCT

Pay = Payroll, 

MatCost = Cost of materials, and 

SubCost = Cost of subcontracted work. 

DOE estimated the incremental builder markup using regression analysis. It calculated 

per firm revenue, cost of goods sold, and payroll from the data provided in the 2002 Economic 

Census Geographic Area Series Construction.12 A regression of per firm revenue on per firm 

cost of goods sold and payroll estimates the coefficients for the equation: 

R = αCGS + βPay i i i 

Where: 

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Ri = Revenue of firm i, 

CGS i = Cost of good sold of firm i, and 

Pay i = Payroll of firm i. 

The coefficient α is an estimate of the incremental builder markup. 

6.1.2.5 Overall Markups 

The overall markup for each distribution channel is the product of the appropriate 

markups, as well as sales tax in the case of replacement applications. 

DOE used the overall baseline markup to estimate the consumer product price of baseline 

models, given the manufacturer cost of the baseline models. As stated above, DOE considers 

baseline models to be product sold under existing market conditions (i.e., without new energy 

conservation standards). The following equation shows how DOE used the overall baseline 

markup to determine the product price for baseline models. 

CPP = COST ×(MU × MU ×Tax ) = COST × MU BASE MFG MFG BASE SALES MFG OVERALL _ BASE 

Where:
 

CPPBASE = Consumer product price for baseline models,
 

COSTMFG = Manufacturer cost for baseline models,
 

MUMFG = Manufacturer markup,
 

MUBASE = Baseline replacement or new home channel markup,
 

TaxSALES = Sales tax (replacement applications only), and
 

MUOVERALL_BASE = Baseline overall markup.
 

Similarly, DOE used the overall incremental markup to estimate changes in the consumer 

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

from an energy conservation standard to raise product energy efficiency. The total consumer 

product price for higher energy efficient models is composed of two components: the consumer 

product price of the baseline model and the change in consumer product price associated with the 

increase in manufacturer cost to meet the new energy conservation standard. The following 

equation shows how DOE used the overall incremental markup to determine the consumer 

product price for higher energy efficient models (i.e., models meeting new energy conservation 

standards). 

CPP STD = COST MFG × MU OVERALL _ BASE + ΔCOST MFG ×(MU MFG × MU INCR ×Tax SALES )

= CPP BASE + ΔCOST MFG × MU OVERALL _ INCR 

Where: 

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CPPSTD = Consumer product price for models meeting new energy 

conservation standards, 

CPPBASE = Consumer product price for baseline models, 

COSTMFG = Manufacturer cost for baseline models, 

ΔCOSTMFG = Change in manufacturer cost for higher energy efficient models, 

MUMFG = Manufacturer markup, 

MUINCR = Incremental replacement or new home channel markup, 

TaxSALES = Sales tax (replacement applications only), 

MUOVERALL_BASE = Baseline overall markup (product of manufacturer markup, 

baseline replacement or new home channel markup, and sales tax), 

and 

MUOVERALL_INCR = Incremental overall markup. 

6.2 MANUFACTURER MARKUP 

DOE determined that the manufacturer markups for all product. Details are provided in 

chapter 5, Engineering Analysis. 

6.3 RETAILER MARKUP 

DOE used financial data from the U.S. Census 1997 Business Expenses Survey (BES), in 

the “Electronics and Appliance Stores” category, to calculate markups used by retailers of the 

three heating products.6 

Table 6.3.1 shows the BES data that DOE used and the retail markups for these 

appliances that DOE estimated following the procedures described above in section 6.1.2.2. 

More detailed information regarding these values can be found in appendix 6-A, Detailed Data 

for Product Markups. DOE estimates the baseline retail markup to be 1.45 and the incremental 

retail markup to be 1.15. 

Table 6.3.1 Data Used to Calculate Retailer Markup 

Item Million 1997$ 

Sales (revenue) 

Cost of Goods Sold (CGS) 

Gross Margin (GM) 

10,343 

7,151 

3,192 

Non-Labor Scaling Costs 1,068 

Baseline Markup 

Incremental Markup 

1.45 

1.15 

6 Source: 1997 Economic Census, Business Expenses Survey. 

6.4 DISTRIBUTOR MARKUP 

DOE used financial data from the BES for two categories to calculate markups used by 

distributors of water heaters and direct heating equipment.6 The category “Electrical Goods 

Merchant Wholesalers” includes electric water heaters, and the category “Hardware, and 

Plumbing and Heating Equipment and Supplies Merchant Wholesalers” includes non-electric 

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water heaters and direct heating equipment. Pool heater distributors are not explicitly categorized 

in the BES, but for this analysis are assigned to the “Hardware, and Plumbing and Heating 

Equipment and Supplies Merchant Wholesalers” category. The markups for these categories 

were calculated as described in section 6.1.2.2. 

Table 6.4.1 shows the data from the BES and the distributor markups DOE estimated 

using the procedures described above in section 6.1.2.2. More detailed information regarding 

these values can be found in appendix 6-A, Detailed Data for Product Price Markups. DOE 

estimates the electric water heater distributor baseline markup to be 1.28 and incremental markup 

to be 1.10. For non-electric water heaters, pool heaters, and direct heating equipment, the 

baseline distributor markup is estimated to be 1.35 and the incremental markup is estimated to be 

1.11. The markup is lower for electric water heaters because their distributors are grouped with 

electrical goods wholesalers. 

Table 6.4.1 Data Used to Calculate Distributor Markup 

Electrical Goods 

Merchant 

Wholesalers 

Hardware, and 

Plumbing and Heating 

Equipment and Supplies 

Merchant Wholesalers 

Item Million 1997$ Million 1997$ 

Sales (revenue) 

Cost of Goods Sold (CGS) 

Gross Margin (GM) 

205,688 

160,435 

45,253 

74,080 

54,835 

19,245 

Non-Labor Scaling Costs 15,784 6,190 

Baseline Markup 

Incremental Markup 

1.28 

1.10 

1.35 

1.11 

6 Source: 1997 Economic Census, Business Expenses Survey. 

6.5 CONTRACTOR MARKUP 

DOE used gross margin data reported in the Air Conditioner Contractors of America 

(ACCA) 2005 Financial Analysis for the HVACR Contracting Industry10 to calculate the 

baseline markup for contractors that install direct heating equipment and pool heaters. ACCA 

reports that for residential and light commercial contractors, gross margin is 24 percent of sales. 

Using the procedure described in 6.1.2.3, DOE estimates the contractor markup for direct heating 

equipment to be 1.32. For the contractor markup for water heaters and pool heaters, the value 

from RS Means is 1.10.e11 

e The information gathered by DOE suggests that contractors place little markup on the water heater in replacement 

applications. The plumbing contractor prices his total installation; he generally "line items" the water heater as one 

item in the total price along with delivery (trip charge), installation parts, permit (in some cases), second story (or 

attic, basement, etc.) adder, labor, old heater haul away, and other various charges. Thus, he may list a competitive 

price for the water heater (with little if any markup) but build in more profit into other items. 

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Neither of the above data sources provides sufficient detail to allow estimation of 

baseline and incremental markups, so DOE used one and the same markup for each markup. 

6.6 BUILDER MARKUP 

To estimate a markup for homebuilders, DOE collected data on new single-family 

housing construction from the 2002 Economic Census Geographic Area Series for 

Construction.12 For 42 states, the Census reports the number of construction firms, payroll, value 

of construction, cost of materials, and cost of subcontracted work. Using the approach described 

in section 6.1.2.4, DOE used this data to estimate a baseline builder markup in each state.f 

Appendix 6-A, Detailed Data for Product Price Markups, shows the state baseline markups, 

which average 1.31. DOE used this national-average markup. 

To estimate an incremental markup for homebuilders, DOE used data from the 2002 

Economic Census Geographic Area Series Construction12 to calculate average per firm value of 

construction, CGS, and payroll for each state, shown in appendix 6-A, Detailed Data for Product 

Price Markups. A regression analysis of per firm value of construction on per firm CGS and per 

firm payroll produced an estimate of the incremental builder markup of 1.26.g 

6.7 SALES TAX 

The sales tax represents state and local sales taxes that are applied to the consumer 

product price in replacement applications. The sales tax is a multiplicative factor that increases 

the consumer product price. 

DOE derived state and local taxes from data provided by the Sales Tax Clearinghouse.13 

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 6.7.1 below. 

f Only 42 states are included in this analysis because necessary data was withheld for the other 8 states. 

g R-square: 0.97, standard error on incremental markup: 0.056. This regression assumes a non-zero intercept. 

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Table 6.7.1 Average Sales Tax Rates by Census Division and Large State
 

Census Division/State Tax Rate (2008) 

New England 5.48% 

Mid Atlantic 6.54% 

East North Central 6.94% 

West North Central 6.76% 

South Atlantic 6.33% 

East South Central 7.89% 

West South Central 8.40% 

Mountain 6.65% 

Pacific 7.51% 

New York 8.25% 

California 9.00% 

Texas 8.05% 

Florida 6.70% 

DOE then derived U.S. weighted-average tax values for each of the three major heating 

products, shown below in Table 6.7.2. For water heaters, which have close to 100 percent 

saturation in each of the divisions and large states, DOE used population weights for each 

division/state. For direct heating equipment and pool heaters, DOE based the weighting on the 

product’s saturation within each division and large state. It determined the saturations from the 

DOE Energy Information Administration (EIA)’s 2005 Residential Energy Consumption 

Survey.14 Since pool heaters have higher saturation in states with lower tax rates than direct 

heating equipment, the weighted-average tax rate for pool heaters is lower. 

Table 6.7.2 Weighted-Average Sales Tax Rates by Product 

Product Tax Rate 

Gas Storage Water Heaters 7.4% 

Electric Storage Water Heaters 7.0% 

Oil Storage Water Heaters 6.6% 

Instantaneous Water Heaters 7.4% 

Pool Heaters 7.4% 

Direct Heating Equipment 7.4% 

6.8 SUMMARY OF MARKUPS 

Tables 6.8.1 through 6.8.4 summarize the markups at each stage in the distribution 

channel (including sales tax where appropriate) and the overall baseline and incremental 

markups for replacement and new construction applications for the three heating products. 

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Table 6.8.1 Markups for Water Heaters, Replacement Applications
 

Gas Storage 

Base. Incr. 

Oil Storage 

Base. Incr. 

Gas Instantaneous 

Base. Incr. 

Electric Storage 

Base. Incr. 

Manufacturer 1.31 1.30 1.45 1.28 

Retailer 1.45 1.15 1.45 1.15 1.45 1.15 1.45 1.15 

Distributor 1.35 1.11 1.35 1.11 1.28 1.10 1.35 1.11 

Contractor 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 

Sales Tax 1.074 1.066 1.074 1.070 

Overall* 

Repl A 

Repl B 

2.04 

2.09 

1.62 

1.72 

2.01 

2.06 

1.59 

1.69 

2.26 

2.19 

1.79 

1.88 

1.99 

2.03 

1.58 

1.67 

Wtd Avg Repl 2.06 1.66 2.03 1.63 2.20 1.87 2.01 1.61 

* The overall markup is the average of the total markups for distribution channels A and B, weighted by the 

estimated shares of each channel in total replacement installations. As described in section 6.1, the estimated share 

of Channel A is 60 percent for storage water heaters and 10 percent for instantaneous water heaters. 

Table 6.8.2	 Markups for Water Heaters, New Home Applications 

Gas Storage Oil Storage Gas Instantaneous Electric Storage 

Base. Incr. Base. Incr. Base. Incr. Base. Incr. 

Manufacturer 1.31 1.30 1.45 1.28 

Distributor 1.35 1.11 1.35 1.11 1.28 1.10 1.35 1.11 

Contractor 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 

Builder 1.31 1.26 1.31 1.26 1.31 1.26 1.31 1.26 

Overall* 

New A 

New B 

2.32 

2.55 

1.83 

2.02 

2.30 

2.53 

1.82 

2.00 

2.43 

2.67 

2.01 

2.21 

2.26 

2.49 

1.79 

1.97 

Wtd Avg New 2.43 1.92 2.41 1.91 2.55 2.11 2.38 1.88 

* The overall markup is the average of the total markups for distribution channels A and B, weighted by the 

estimated shares of each channel in total new home installations. As described in section 6.1, the estimated shares of 

Channel A and B are each 50 percent 

Table 6.8.3	 Markups for Direct Heating Equipment and Pool Heaters, Replacement 

Applications 

Direct Heating 

Equipment Pool Heaters 

Baseline Incremental Baseline Incremental 

Manufacturer 1.35 1.30 

Distributor 1.35 1.11 1.35 1.11 

Contractor 1.32 1.32 1.10 1.10 

Sales Tax 1.074 1.074 

Overall 2.58 2.12 2.07 1.70 

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Table 6.8.4 Markups for Direct Heating Equipment and Pool Heaters, New Home 

Applications 

Direct Heating 

Equipment Pool Heaters* 

Baseline Incremental Baseline Incremental 

Manufacturer 1.35 1.30 

Distributor 1.35 1.11 1.35 1.11 

Contractor 1.32 1.32 -­ -­

Builder 1.31 1.26 1.31** 1.26** 

Overall 3.15 2.49 2.30 1.82 

*In the case of new homes, the pool builder purchases the product directly 

from a distributor or wholesaler without contractor involvement. 

**It is assumed that pool builders have the same markup as home builders. 

6.8.2 Validation of Estimated Markups for Water Heaters 

As part of its market data collection, DOE assembled a data base with retail Internet 

prices for a large number of water heater models at baseline efficiency. For each model, DOE 

divided the retail price by the manufacturer cost for the appropriately-sized water heater 

(estimated as described in chapter 5) to derive an implicit markup. This markup would include 

the manufacturer markup and the retail markup. To be comparable with the overall markups 

shown in Table 6.8.1, DOE added a national population-weighted average sales tax. See 

appendix 6-A, Detailed Data for Product Markups, for the derivation of the implicit markups. 

The implicit water heater markups are very similar to the overall markups calculated for 

the retail distribution channel (“Channel Repl A”) for electric and oil-fired storage water heaters, 

and are about 10 percent higher for gas storage water heaters and gas instantaneous water heaters 

(Table 6.8.5). Exact agreement should not be expected, since the retail channel markups in Table 

6.8.1 refer mainly to physical stores, and prices given on the Internet may not reflect in-store 

promotions. In addition, actual manufacturing costs may be different from the costs used to 

calculate the implicit markups. 

Table 6.8.5 Water Heater Manufacturer and Retail Markup Validation 

Water Heater Type 

Implicit Markup 

Based on 

Retail Prices 

Calculated Markup 

Gas (40 gallon) 2.42 2.04 

Electric (50 gallon) 2.10 1.99 

Oil (30 gallon) 2.13 2.01 

Gas Instantaneous 2.43 2.26 

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6.8.3 Application of Markups 

The example provided below for gas water heaters illustrates how DOE used the baseline 

and incremental markups to derive a consumer product price in the case of replacement 

applications moving through the retailer channel. Assuming the baseline manufacturer cost is 

$160 and the change in manufacturer cost to meet a given energy conservation standard is $15, 

the resulting baseline consumer product cost (CPPBASE) and higher energy efficient product cost 

(CPPSTD) are: 

CPP = COST ×(MU × MU ×Tax ) BASE MFG MFG RET SALES 

= $160 ×1.31 ×1.45 ×1.074 = $326 

CPP = CPP + ΔCOST ×(MU × MU ×Tax ) STD BASE MFG MFG INCR SALES 

= $342 + ($15 ×1.31 ×1.15 ×1.074) = $342 + $24 = $350 

DOE used the overall markups for replacement and new home applications in the LCC 

analysis by applying the appropriate markup to products assigned to the replacement and new 

home market segments (see chapter 8 for discussion of this assignment). 

The rebuttable payback period analysis does not distinguish between replacement and 

new home applications, so it requires an average overall markup for each major heating product. 

The average overall markup depends on the share of replacement and new home applications in 

total shipments. DOE derived these shares for 2013 (for direct heating equipment and pool 

heaters) or 2015 (for water heaters) from the Shipments Model, as described in chapter 9, and 

then calculated weighted-average overall markups. Tables 6.8.6 and 6.8.7 show the shares and 

weighted-average overall markups for each major heating product. 

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Table 6.8.6 Weighted-Average Overall Markups for Water Heaters
 

Gas Storage 

WH 

Electric 

Storage WH 

Oil Storage 

WH 

Instantaneous 

Gas WH 

Overall Baseline Markup 

Overall markup for 

replacement applications 

Market share of replacement 

2.06 2.01 2.03 2.20 

applications (%) 

Overall markup for new home 

80 80 85 70 

applications 

Market share of new home 

2.43 2.38 2.41 2.55 

applications (%) 20 20 15 30 

Weighted-avg overall markup 2.13 2.08 2.09 2.31 

Overall Incremental Markup 

Overall markup for 

replacement applications 

Market share of replacement 

1.66 1.61 1.63 1.87 

applications (%) 

Overall markup for new home 

80 80 85 70 

applications 

Market share of new home 

1.92 1.88 1.91 2.11 

applications (%) 20 20 15 30 

Weighted-avg overall markup 1.71 1.66 1.67 1.94 

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Table 6.8.7 Weighted-Average Overall Markup for Pool Heaters and Direct Heating 

Equipment 

Pool 

Heaters 

Gas Wall 

Fan DHE 

Gas Wall 

Gravity 

DHE 

Gas 

Floor 

DHE 

Gas 

Room 

DHE 

Gas 

Hearth 

DHE 

Overall Baseline Markup 

Overall markup for 

replacement applications 2.07 2.58 2.58 

Market share of 

2.58 2.58 2.58 

replacement applications 

(%) 

67 82 90 

Overall markup for new 

90 90 50 

home applications 2.30 3.15 3.15 

Market share of new home 

3.15 3.15 3.15 

applications (%) 33 18 10 

Weighted-average overall 

10 10 50 

markup 2.15 2.68 2.64 2.64 2.64 2.87 

Overall Incremental 

Markup 

Overall markup for 

replacement applications 1.70 2.12 2.12 

Market share of 

2.12 2.12 2.12 

replacement applications 

(%) 

67 82 90 

Overall markup for new 

90 90 50 

home applications 1.82 2.49 2.49 

Market share of new home 

2.49 2.49 2.49 

applications (%) 33 18 10 

Weighted-average overall 

10 10 50 

markup 1.74 2.19 2.16 2.16 2.16 2.31 

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REFERENCES
 

1.	 U.S. Department of Energy - Energy Efficiency & Renewable Energy, Technical Support 

Document: Energy Efficiency Standards for Consumer Products: Residential Water 

Heaters, 2001. Washington, DC. 

2.	 U. S. Department of Commerce - Bureau of the Census, New Housing Operative 

Builders: 2002, Construction Industry Series, 2005. Washington, D.C. 

3.	 U. S. Department of Commerce - Bureau of the Census, New Single-Family Housing 

Construction (Except Operative Builders): 2002, Construction Industry Series., 2005. 

Washington, D.C. 

4.	 U.S. Department of Energy - Energy Efficiency & Renewable Energy, Technical Support 

Document: Energy Efficiency Standards for Consumer Products: Residential Furnaces 

and Boilers, 2007. Washington, DC. 

5.	 Hamos, R., Consultant Report - Pool Heater Distribution Channels, 2007. 

6.	 U.S. Department of Commerce - Bureau of the Census, 1997 Economic Census: Business 

Expenses, 2000. Washington, DC. 

7.	 Skaer, M., What should you charge? Try These Tested Formulas. The Air Conditioning, 

Heating, and Refrigeration News, 

2001<http://www.achrnews.com/CDA/ArticleInformation/features/BNP__Features__Ite 

m/0,1338,23113,00.html> 

8.	 U. S. Department of Commerce - Bureau of the Census, Statistics of U.S. Businesses., 

2004. Washington, DC. 

9.	 Pindyck, R. S. and D. L. Rubinfeld, Microeconomics. 5th ed. 2000. Prentice Hall: New 

Jersey. 

10.	 Air Conditioning Contractors of America (ACCA), Financial Analysis for the HVACR 

Contracting Industry: 2005, 2005. Washington, DC. 

11.	 RS Means Company Inc., Mechanical Cost Data - 31th Annual Edition. 2008. ed. M. 

Mossman. Kingston, MA. 

12.	 U. S. Department of Commerce - Bureau of the Census, 2002 Economic Census 

Geographic Area Series Construction., 2005. Washington, DC. 

13.	 Sales Tax Clearinghouse Inc., State Sales Tax Rates Along with Combined Average City 

and County Rates, 2009. <http://thestc.com/STrates.stm> 

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14.	 U.S. Department of Energy - Energy Information Administration, Residential Energy 

Consumption Survey, 2005 Public Use Data Files, 2005. Washington, DC. 

< http://www.eia.doe.gov/emeu/recs/recspubuse05/pubuse05.html > 

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