Markup is the amount a business adds to the price of the product before they sell it. Typically expressed as a percentage, markup is the difference between the cost of goods sold (COGS) and what the customer pays for the product.
Markup is especially valuable to retailers because it offsets costs and helps them price products so they turn a profit. Although gross profit margin is a more popular metric that determines the retailer’s profitability, markup is still important because it influences a business’s pricing strategy.
What is markup?
When a business sells a product to a customer, they never charge the customer for the amount it costs to make the product. For example, if it costs Target $5 to produce a pair of shoes, it isn’t going to charge the customer $5 for the shoes.
That’s because businesses need to turn a profit, and the way they do that is with markups. A markup is an increase in the price of a product that helps businesses turn a profit. If you don’t mark up your products, you aren’t making a positive return, so markups are essential for long-term success.
It’s important to calculate markup because:
It helps businesses price their products correctly.
It’s simpler to calculate and quickly gives businesses a general idea of their performance.
It affects your margins. Selling price is an input for calculating your gross margins, so your markups do have an impact on your profitability.
Markup percentages help businesses predict their future profitability.
Markup versus margin
Although they sound similar, markup and margin are two very different metrics.
Both markup and margin look at your selling price and COGS. But margin is the amount of profit your business earns after making a sale. Margin accounts for other expenses that markup doesn’t take into account, so it can be a more useful metric for predicting profitability.
But that doesn’t mean markup is a useless metric. It’s incredibly important for determining how you price your products, which will ultimately affect your margins.
How to calculate markup
The best way to calculate markup is by percentage. This way, you can apply the same markup across SKUs, regardless of how much they cost.
It’s easy to calculate markup as a percentage with this formula:
Markup percentage = (price – COGS) / COGS x 100
For example, let’s say:
Your COGS is $10 for one item.
You sell the product to the customer for $30.
Markup percentage = ($30 – $10) / $10 x 100
This means your markup on every item is 200%.
While this is useful to know, sometimes retailers know their markup percentage and want to use it to calculate the price of an item. In this scenario you would use this formula:
Selling Price = [(Markup x COGS) + COGS] x 100
For example, if you know your markup percentage is 50% and your COGS is $100, you’d need to price the item at $150.
While these formulas make it easy to calculate markup, keep in mind that other factors can influence how much you charge your customers. Factors like: