What Is Markup?
Markup is the amount added to the cost price of a product to determine its selling price. It is expressed as a percentage of the cost, not the selling price. Understanding markup is essential for any business owner who needs to price products profitably while remaining competitive in the market.
The Markup Formula
Selling Price = Cost × (1 + Markup Percentage ÷ 100)
Step-by-Step Example
You buy a product for $40 and want a 75% markup:
- Convert markup to decimal: 75% ÷ 100 = 0.75
- Calculate selling price: $40 × (1 + 0.75) = $40 × 1.75 = $70
- Profit per unit: $70 - $40 = $30
Finding the Markup Percentage
You bought an item for $25 and sold it for $40:
- Calculate difference: $40 - $25 = $15
- Divide by cost: $15 ÷ $25 = 0.60
- Convert to percentage: 0.60 × 100 = 60% markup
Markup vs Margin: Know the Difference
Markup and margin are NOT the same. Markup is based on cost; margin is based on selling price. Confusing them can lead to serious pricing errors and lost profits.
| Cost | Selling Price | Markup % | Margin % |
|---|---|---|---|
| $50 | $75 | 50% | 33.3% |
| $50 | $100 | 100% | 50% |
| $50 | $125 | 150% | 60% |
| $50 | $150 | 200% | 66.7% |
| $50 | $200 | 300% | 75% |
Converting Between Markup and Margin
Markup = Margin ÷ (1 - Margin)
Example: A 50% markup equals a margin of 0.50 ÷ 1.50 = 33.3%. A 33.3% margin equals a markup of 0.333 ÷ 0.667 = 50%.
Common Markup Percentages by Industry
| Industry | Typical Markup | Equivalent Margin |
|---|---|---|
| Grocery / Supermarket | 5-25% | 5-20% |
| Clothing / Apparel | 100-300% | 50-75% |
| Restaurants (food) | 200-400% | 65-80% |
| Restaurants (beverages) | 300-500% | 75-85% |
| Jewelry | 100-300% | 50-75% |
| Electronics | 20-50% | 17-33% |
| Furniture | 200-400% | 65-80% |
| Pharmaceuticals | 200-5000% | 65-98% |
Setting the Right Markup
When deciding your markup, consider these factors:
- Operating expenses: Your markup must cover rent, utilities, labor, and all overhead costs.
- Competitor pricing: Research what competitors charge for similar products.
- Perceived value: Premium branding allows for higher markups.
- Volume expectations: High-volume products can survive on lower markups.
- Seasonal demand: Adjust markups based on peak and off-peak periods.
- Target profit: Work backward from your desired profit to calculate the needed markup.
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