There's a reason why it's not a good idea to come up with a lower markup for your products or services. That's because the lower markup might not be enough to generate healthy profit and also cover indirect costs, overhead expenses, and other necessary expenses.
To “markup” the cost of a good means to add a certain percentage to the original cost of the product to determine the selling price. How do you calculate markup right? In order for a business to apply markup pricing, it must first determine the actual cost of the product. From here, they will then decide on the amount of profit to be earned, increase the percentage, and add the additional amount on to the preexisting cost. Retailers apply the method of cost markup to help ensure that their company makes a profit.
Markup Percentage Formula
The markup percentage formula is strategically calculated. To get the calculation for markup percentage, one must calculate the gross profit.
- Gross Profit: Sale Price - Unit Cost = Gross Profit For example, if your sale price is $100 and the unit cost is $80, then your gross profit is $20.
- Markup Percentage:Gross Profit / Unit Cost x 100 = Markup Percentage Once the gross profit is calculated, you can then calculate the markup percentage using the above formula. Using the same example from above the formula would look like this: $20 / $80 x 100 = 25%
The markup formula is always multiplied by 100 because it allows the number to be further expressed as a percentage, rather than stay a decimal. For example, if it wasn’t multiplied by 10, the equation would be $20 / $80 = 0.25 — multiplying by 100 then turns 0.25 into 25%.
Markup Percentage Calculator
Onto markup calculation: A markup calculator is a tool that is used by businesses to help calculate the sale price of their goods. Online markup percentage calculators can be used to help a company accurately calculate the different costs, such as revenue costs and profits.
To put the markup percentage formula into a real-world perspective, here is an example of how and when it may be used.
A business owner sells a laptop for $575, but it only cost them $400 to purchase the laptop in the first place — they then made a profit of $175. In order for the business owner to figure out the exact markup percentage, they will then take these numbers and plug them into the formula.
Gross Profit ($175) / Unit Cost ($400) x 100 = 43.75% markup rate.
Why Finding the Markup Percentage Is Important
Establishing a pricing strategy can positively reflect profitability for a company. Too low of a price point could potentially result in a loss of profit, whereas too high of a price point could result in the loss of customers. It’s important to balance a price that is high enough to make profits, but low enough to beat the competitors.
When finding the right markup percentage, every business should take into consideration different factors such as production and business costs, revenue goals, competitor’s pricing, incoming and pre-existing products, inventory shrinkages, and miscellaneous costs.
When discussing profit, business owners will also want to take into consideration how much deadstock (or slow-moving/discounted stock) they have in store. The more deadstock they have means less room for the full-priced items and the markup percentage may need to be higher to make up for the potential loss of profits from the deadstock. This could be prevented by implementing software that allows the business owner to take control of the inventory turnover ratio> early on.
Although there isn’t a single “normal” markup amount, indirect costs are — for the most part — consistent within retailers, grocers, and similar businesses. For example, where indirect costs are generally low, markups will tend to be lower as well.
What Is the Difference Between Markup and Margin?
One of the most prominent differences between markup and margin is that margin is the sales subtracted by the cost of goods sold, whereas markup is the amount the cost of a product is increased by.
There are two different types of margin:
- Gross Margins:A company’s net sales revenue subtracted from the cost of goods sold.
- Net Margins:Equal to the amount of net income or profit and is generated as a percentage of revenue, or, the ratio of a company’s net profits.
It’s not uncommon for business owners to confuse markups and margins, especially since both help to set prices and measure productivity.
To calculate margin, begin with the gross profit. Then, find the percentage of revenue that is gross profit. This can be done by dividing your gross profit by the revenue. The equation looks like this:
Gross Profit / Revenue x 100 = Margin
The greater the margin, the greater the percentage of revenue the company keeps after a sale. If a company doesn’t know their margins and markups, they may not know how to properly price their products — which could potentially result in them missing out on revenue.
Not being aware of margins or markups isn’t the only way a company could miss out on earned revenue. This could also happen as a result of unorganized control over inventory and asset tracking. However, inventory and asset tracking solutions could be implemented by the company to help ensure the overall organizational quality over the products.
Markup vs Margin Example
Similar to online markup calculators, there are margin calculators that business owners can use to help ensure the accuracy in their numbers.
To calculate margins one would:
- Find out the cost of goods sold. In this example, we’ll say that’s $30.
- Find their revenue, or, how much they sold their goods for. Let’s say, in this example, they sold their goods for $50.
- Calculate the gross profit by subtracting the cost from the revenue. $50 - $30 = $20
- Divide the gross profit ($20) by the revenue ($50) and multiply by 100. $20 / $50 x 100 = 40%
- This is the calculated profit margin.
Business owners will want to keep in mind that they should never have a negative gross or net profit margin. However, they will also want to keep in mind that there is no set answer on what a “good margin” is. Typically, a net margin of 5% or less is poor, 6% - 10% is okay, and 20% or higher is good. When they set and pursue a pricing rule, it can help to ensure they properly set up discounts, markups, and other price adjustments to better tailor to their customer and business needs.