This is the amount that’s added to the cost of a product or service to determine its selling price. Markup is usually expressed as a percentage of the cost, and the simple fact is that it helps businesses cover their expenses while generating profits.
Why is markup important for small businesses?
Markup lets businesses price their products or services in such a way that they can continue to operate. It helps retailers, dealers, and other service providers stay profitable while ensuring they can cover all operational costs (e.g. rent, wages, overhead expenses).
How to calculate your markup
The markup formula is very simple:
Markup = (Selling Price − Cost Price) ÷ Cost Price × 100
Here’s an example of a markup calculation: Say you’re a retailer, and you buy sunglasses from a supplier for $20 each. You then decide to sell them for $60 to your customers. In this scenario, your markup will be equal to:
(60−20) ÷ 20 × 100 = 200%
In other words, the retail price is 200% higher than the item’s original cost, with a $40 gross profit per sunglasses sale.
Markup vs margin
While it’s true that markup and margin are related concepts, they are not the same, and businesses should consider both when pricing products correctly. Markups are calculated as a percentage of the cost prices, whereas margins are calculated as a percentage of the sale prices. This is important because a higher markup doesn’t necessarily translate to a higher margin.
For example, if one of your products costs $50 and is sold for $100, the markup is 100%, but the margin is only 50%. As a business owner, you need to understand that both figures play a role in setting competitive prices and helping you achieve healthy profit levels. A small increase in markup could result in a big difference in your profit margin.
Common markups in various industries
Different industries will apply different markups based on the level of competition, prices to produce items, consumer demand, and more. High-demand luxury goods often have excessive markups, whereas other industries that sell essential goods will mostly have lower markups due to price sensitivity.
As an example, while designer clothing and electronics might have markups of anywhere between 250–500% or more, grocery staples tend to be sold with only a 25–50% markup. Professionals like consultants and tradespeople can also apply markups to their hourly rates and material costs.
Finding the right markup for your business
Setting an appropriate markup will depend on market demand and competition, your customers’ expectations, operating costs, industry benchmarks, the gross profit needed to continue operating your business, and more.
The good news is that now that you have a better understanding of markup strategies, you can start to think about how to price your business’s products and services most effectively. Get the markup right, and you’ll stay profitable over the long term while continuing to keep your customers satisfied.
See related terms
