A markup is an amount added to the cost price
of an item to get a sell price to make a profit.
Sell Price less Cost Price = Markup
Revenue less Cost of Sale = Gross Profit
if you purchase a hat for a cost of $4.50 and sell it for $7.00 the
difference of $2.50 is the markup or gross profit – take off the
expenses and you have the net profit.
you know the cost and sell prices of an item and want to find out
what the percentage of the markup is, here is the formula:-
Sell price less cost
price divide by cost
an example based on the hat mentioned earlier:-
take away $4.50 = $2.50
divided by $4.50 = 0.55555
the decimal over 2 to get the percentage and round off
markup is 55.56%
is an example guide of markup percentages that a businesss could use.
You will notice the higher the value the lower the markup:-
it Cost )
$51 - $100
$101 - $500
$501 - $1,000
business opt to use one straight forward percentage such as 30% on
businesses opt to go with a 100% markup, plus 10% on everything.
long as whatever the business does the sell price is reasonable,
competitive and suitable to its market, and doesn't leave the
business short of money.
If discounts are provided the markup needs to
be enough to cover this discount as well as the expenses without
hurting the profit. Discounts can be used for:-
encouraging bulk buying by customers
encouraging customers who buy on credit to pay
on time or earlier than due date
A business can use a lower marked-up product to
draw customers in and get them looking at other products in the
catalog that have a higher markup.
Monitoring the Profit
It is essential that a business monitors the
markups of their products and services to ensure the business is
making enough money to cover all costs and making a profit to grow
The best way to monitor if the markups are
servicing the needs of the business is to calculate the gross
profit margin. The
gross profit margin is a percentage figure and is a quick indicator of the profit available to cover costs.
How to Set the Selling Price
How exactly does a business decide what selling
price to set to an item or service?
The main motivator will be the profit:-
How much profit does the business want
to make after all expenses are paid for
And then how much does the business need
to make to cover the cost of buying or making the product and
anything related to that such as freight, customs fees etc.
The markup also needs to cover the general
running costs the business has to pay such as rent, power, wages
This very important decision on profit will
then be influenced by:-
How much the competition sells their products
and services for
The particular niche and geographical location
that the business is in
The size of the business – bigger businesses
may be able to buy larger quantities of a product thereby gaining a
discount giving them the ability to undercut smaller competitors
Manufacturers providing fixed selling prices
for their products
If you offer a service there will be other
considerations such as:-
The quality of work you want to provide
The different aspects within the service i.e. you may want to
provide basic, standard or advanced options
Your customer's wants
Yes, there is a lot to think about to calculate markup prices!
There are several ways to research all this:-
Shop at your competitor's or hire their
services to find out their prices
Read up on selling prices and markups at your
Ask your local business chamber, support or
network group if they have any publications with tips and ideas to
calculate markup prices
Ask your friends and family what they think.
If you have any questions on how to calculate markup prices please contact me.