Calculating Markup as a Component of Selling Price

A Simple Formula for Understanding Your Profit Margin

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What is Markup

Markup is the difference between the cost of a product or service, and its selling price, and is often expressed as a percentage. Markup represents the company's gross or profit margin, and thus it is critical to understand and consider all of the costs, material, labor and overhead, direct and indirect. Markup is used by manufacturers, wholesalers and retailers. Of course, the markup must be sufficient to keep your business profitable and realistic enough to open the door to increased sales and  marketshare expansion.

Other Factors in Determining Markup

The acceptable range of markups are different from industry to industry and are based, in part, on what customers are willing to spend, which, in turn, is influenced by the industry and the pricing strategies of your competitors. For instance, small appliance manufacturers can sometimes assign markups of 30 percent or more, while clothing is often marked up by as much as 100 percent. Even within industries, markups vary. The automotive industry, for example, is usually limited to a 5-10 percent markup on most new cars, but sports utility vehicles may enjoy markups of 25 percent or more. 

Anticipated sales volume is a factor in markup. High volume goods can use a lower markup and still generate the required level of profit. Also, as volume increases, unit costs may come down. The strength of your brand is also a factor in markup. A strong brand can command a higher price and a higher markup, even though cost may be more substantial.

If you are starting a business, establishing markup is one of the most important parts of pricing strategy. Markups must be sizable enough to cover all anticipated business expenses and reductions (markdowns, stock shortages, employee and customer discounts) and still provide the business with a good profit.

 

Calculating the Dollar Markup as a Component of Selling Price

There are two steps in calculating markup as a component of selling price. The first step is to calculate the dollar markup on the selling price. The second step is to use the information from Step One to calculate the percent markup on the selling price. The calculations follow:

If we have a product that costs $15 to buy and it cost $10 to make, how do we calculate the Dollar Markup on Selling Price. Selling Price = Cost + Markup.

You can switch around the equation to calculate markup - Markup = Selling Price - Cost where $15 - $10 = $5.

Calculating the Percent Markup as a Component of Selling Price

If we assume that selling price is 100%, we calculate what percentage of that 100% is the cost and the markup. The calculation would be Percent Markup on Selling Price = $5/$15 = 33.33%.