Markup percentage:
formula and worked example

What markup tells you

Markup is the amount you add to the cost of a product to reach its selling price, expressed as a percentage of the cost. Retailers, traders and manufacturers use it as a quick pricing rule: buy at 400, add a percentage, sell at the result.

Its appeal is simplicity. You can apply the same markup across a product line without recomputing each time. The drawback is that it measures against cost, so it does not tell you what share of a sale becomes profit; that is margin, a different figure on the same transaction.

The formula: profit over cost

Subtract cost from selling price to get the amount added, divide by cost and multiply by 100.

• Cost: what you paid per unit including freight and handling that you can attribute to it.
• Selling price: the price at which you sell, before any sales tax collected for the government.

Because cost is the divisor, a low-cost item can show a very large markup from a small absolute difference. Look at the currency amount as well as the percentage.

When you have several costs, such as purchase price, transport and packaging, decide which count toward the cost base and keep that definition fixed. A markup computed on a narrow base looks larger than one computed on landed cost, and comparing the two as if they were the same is a frequent source of confusion between buyers and sellers.

Worked example: cost 400, selling price 550

1. 1Amount added: 550 - 400 = 150.
2. 2Divide by cost: 150 / 400 = 0.375.
3. 3Convert to a percentage: 0.375 x 100 = 37.5%.
4. 4Check the margin on the same sale: 150 / 550 is about 27.3%.

The same sale is a 37.5% markup and a 27.3% margin. Neither is wrong; they answer different questions, and quoting one while believing it to be the other leads to underpricing.

Markup versus margin in practice

Markup answers how much you loaded on top of what you paid. Margin answers how much of what the customer paid remains with you. A target margin of 25% needs a markup of about 33%, and a 50% markup yields only a margin of about 33%. Converting between them is simple, but it must be done deliberately.

There is no universal good level. Perishable goods, low-volume specialist products and services typically need higher markups than fast-turning staples, and competitive pressure in your market ultimately sets the ceiling. Use the figure to compare products inside your own range, not to chase someone else's headline number.

Markup also makes discounting dangerous. A 10% discount on a price of 550 gives 495, and against a cost of 400 that cuts the markup from 37.5% to 23.75%, losing more than a third of the markup. Discounting needs to be assessed against the margin it eats, not the percentage on the label.

Where products are sold in bundles, calculate markup per bundle using the combined cost, because a high markup on one item can be cancelled by giving another away.

What happens to markup when cost rises

At a cost of 440 and an unchanged selling price of 550, the markup drops from 37.5% to 25%, a fall of 12.5 points from a 10% cost move. To restore the original 37.5% on the new cost you would need to price at 605. Small cost changes get amplified because the gap between cost and price is thin.

Mistakes in setting and reading markups

• Applying the markup percentage to the selling price instead of the cost, which gives a lower price than intended.
• Quoting markup to a supplier or investor when they are asking about margin.
• Leaving freight, packaging or wastage out of cost, so the real markup is smaller than the one calculated.
• Including sales tax in the selling price, which inflates both price and markup.

One more habit to avoid is copying a competitor's markup. Their cost base, volume and overheads differ from yours, and a markup that works for a high-volume chain may starve a small shop of the margin it needs to cover rent and wages.

Using markup to build a price list

Start from landed cost, decide the margin you need, convert it to the equivalent markup, and test the resulting price against what customers will pay. If the market will not bear it, revisit cost or accept a lower margin.

1. 1Work out the landed cost per unit.
2. 2Choose the target margin and convert to markup.
3. 3Multiply cost by one plus the markup to get the price.
4. 4Review prices when supplier costs change.