What is Markup?

The markup is the sum added to the cost of production to get the selling price of the product, and it is always presented as a percentage of cost. It seeks to answer the question, “What is the extra charge that I’m putting above my cost?”, and it is one of the most misunderstood ideas of pricing for many businesspeople.

Markup Calculation Formula

Calculation of Markup Percentage

In calculating the markup percentage, subtract the cost from the selling price and then divide the result by the cost.

Example:

If the cost of a good is $80 while the selling price is $100, the calculation is:

Markup = $100 – $80 = $20

Markup percentage = ($20 ÷ $80) × 100 = 25%

In conclusion, the markup on the product is 25%.

Calculation of Markup Price

When the cost and the markup percentage are known, you will use the formula:

Selling price = Cost (1 + Markup percentage)

In an instance where the cost of a product is $100 with a markup of 30%, the price is:

$100 × (1 + 0.30) = $130

How to Determine the Correct Markup?

• It should be determined from the required gross margin, not from gut feeling. Start by calculating the required gross margin to cover fixed costs and reach the profitability goal, and then determine the markup from that gross margin using the formula presented earlier.
• Calculate all costs you incur to deliver a product or a service, including shipping, customer returns, payment processing, and packaging costs.
• Do competitor benchmarking and industry benchmarking, but don’t follow the others blindly; you will have a different cost structure.
• Determine price elasticity; a higher markup will bring more profit per unit but will lower sales volume.

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