2 min read
Markup describes the difference between the cost of a good and its final selling price. Businesses must mark up the price of goods in order to make a profit, so knowing how markup works and how to use it is vital for any company that sells goods or services. Knowing how to set markups correctly can make a huge difference for your business; if your markup is too high, you risk losing potential sales, and if it’s too low, you’re missing out on opportunities for stronger profits.
The difference between markup and margin
Markup is sometimes confused with profit margin, as both are calculated using the same inputs. Profit margin describes the revenue a business makes after paying the cost of goods sold (COGS). Cost of goods sold is subtracted from sales revenue, and then presented as a percentage of total revenue.
For example, if it costs $50 for a business to manufacture a product, and that business sells that product for $85, you’ll calculate the profit margin by subtracting 50 from 85, which is 35. To get a percentage, divide the margin, 35, by sales, 85, and multiply by 100. The result for this example would be a profit margin of 41.2%.
How to calculate markup percentage
Markup is different from profit margin as it states the difference between the cost of goods sold and the price it’s sold for. In the previous example, we’ve already worked out that the markup for the product is $35. The retail price is $85, the cost to manufacture is $50, and the markup is the difference. However, markup is also shown as a percentage, but as a percentage of costs, not a percentage of revenue.
So, take the value of the markup, $35, divide it by the COGS, $50, and multiply by 100 to get a percentage – in this case the markup percentage is 70%.
Markup percentage calculator
You can use a markup calculator online to help find the right markup for your specific profit goals, but the markup formula is simple:
(Selling Price) - (Cost of Goods Sold) = Markup
(Markup/Cost of Goods Sold) x 100 = Markup Percentage
How to use markup percentage
You should calculate markups to inform your pricing decisions. You want to make sure that you’re earning enough from your sales to not only cover the cost of goods sold, but also enough to help cover overheads like wages, facilities, etc. Remember that the cost of goods sold is not necessarily the only costs you’ll encounter, but you can still use markup calculations to help figure out how much you need to sell your product to cover all costs and business expenses and generate a profit.
You may need what appears to be quite a high markup in order to cover additional costs, because markup percentage is based only on price against cost of goods sold.
For instance, you may be selling a piece of clothing that cost you $30 to produce, but in addition to the manufacturing cost, you also need to pay for advertising, which might involve various costs for photography, models, ad space, and so on. Your markup will then need to be relatively high to cover all of these extra costs.
You may have a goal profit margin that you’re aiming for, and you can calculate markups to ensure you reach these goals.
There isn’t really a one-size-fits-all markup percentage that will work for every industry or every product. It really comes down to your business needs, but it’s important to not stretch too far from your competitors’ approach as you may risk losing your spot in the market by going too low or too high. Average markups vary hugely from sector to sector, so be sure to do the research and learn what to expect for your specific product.
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