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.