Markup

Before you rely on it

What to check

State the denominator whenever a percentage is quoted.

The common error

Where people go wrong with markup

Setting a target margin and applying it as a markup. The product comes out underpriced, and the gap widens on exactly the items where margin matters most.

Worked through

Markup in plain numbers

A shop buys an item for $60 and sells it for $90. Markup is ($90 − $60) ÷ $60, or 50%. The gross margin on the same sale is $30 ÷ $90, or 33.3%. Same profit, two percentages, two different denominators. If you want a 40% margin on a $60 cost, a 40% markup gives only $84, a margin of 28.6%; the right price is $60 ÷ (1 − 0.40), or $100. This is the reason shopkeepers and accountants sometimes talk past each other: markup is measured on cost, and margin on price.

Easily confused

Markup and its neighbours

Markup is not margin, and it is not profit. Markup is the amount added to cost, expressed as a percentage of cost. Margin is the share of the selling price that is profit, and a 100% markup is a 50% margin. Markup differs from a discount, which subtracts from price, and from a surcharge, which adds a fee. Retail and wholesale trades often quote markup, while financial statements report margin. Mixing them up leads to underpricing, which is one of the most common small-business pricing errors.

In real decisions

Where markup turns up

Retailers set prices from wholesale cost plus a target markup. Contractors mark up materials and labor. Restaurants price dishes from ingredient costs. E-commerce sellers add markup to cover shipping, fees and profit; a markup calculator converts between markup and margin and finds the price to reach a target margin; it helps in quoting jobs, testing whether a discount is affordable and comparing supplier prices.

Know the edges

Where markup stops being reliable

A markup on cost does not cover overhead unless it is high enough to. Discounts and returns reduce realized markup. Competitive pressure limits how much can be added. Uniform markups ignore that some items sell faster; use markup as a starting rule, then check the resulting margin against expenses and adjust by product.

Quick answers

What people ask about markup

How do I convert markup to margin? Margin equals markup divided by one plus markup. A 50% markup gives a margin of 0.5 ÷ 1.5, or 33.3%.

How do I set a price for a target margin? Divide cost by one minus the margin. To earn a 40% margin on a $60 cost, price at $60 ÷ 0.6, which is $100.

Should every product carry the same markup? Not necessarily. Fast-moving items can carry less and specialty items more. Look at total gross profit, not only the percentage on each item.

Can markup exceed one hundred percent? Yes. If the price is more than double the cost, markup is above 100 percent. Margin can never exceed 100 percent.

What is a keystone markup? A markup of 100 percent, so price is double the cost. It is a traditional retail rule of thumb and equals a 50 percent margin.