Tag Archives | markup percentage

Markup Percentage Calculation

See Also:
Margin vs Markup
Margin Percentage Calculation
Retail Markup
Gross Profit Margin Ratio Analysis
Operating Profit Margin Ratio Analysis

Markup Percentage Definition

Define the markup percentage as the increase on the cost price. The markup sales are expressed as a percentage increase as to try and ensure that a company can receive the proper amount of gross profit. Furthermore, markups are normally used in retail or wholesale business as it is an easy way to price items when a store contains several different goods. Now, look at the markup percentage calculation.

Markup is great. But if you aren’t intentionally pricing for profit, then you’re missing out on some opportunities for big improvements. Click here to download your free Pricing for Profit Inspection Guide now.

How to Calculate Markup Percentage

By definition, the markup percentage calculation is cost X markup percentage. Then add that to the original unit cost to arrive at the sales price. The markup equation or markup formula is given below in several different formats. For example, if a product costs $100, then the selling price with a 25% markup would be $125.

Gross Profit = Sales Price – Unit Cost = $125 – $100 = $25

Now that you have found the gross profit, let’s look at the markup percentage calculation:

Markup Percentage = Gross Profit/Unit Cost = $25/$100 = 25%

The purpose of markup percentage is to find the ideal sales price for your products and/or services. Use the following formula to calculate sales price:

Sales Price = Cost X Markup Percentage + Cost = $100 X 25% + $100 = $125

As with most things, there are good and bad things about using markup percentage. One of the pitfalls in using the markup percentage to calculate your prices is that it is difficult to ensure that you have taken into consideration all of your costs. By using a simple rule of thumb calculation, you often miss out on indirect costs.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

Markup Percentage Calculation Example

For example, Glen started a company that specializes in the setup of office computers and software. He decided that he would like to earn a markup percentage of 20% over the cost of the computers to ensure that he makes the proper amount of profit. Furthermore, Glen has recently received a job to set up a large office space. He estimates that he will need 25 computers at a cost of $600 a piece. In addition, Glen will need to set up the company software in the building. The cost of the software to run all the computers is around $2,000. If Glen wants to earn the desired 20% markup percentage for the job, then what will he need to charge the company?

(Looking for more examples of markup? If so, then click here to access a retail markup example.)

Step 1

First, Glen must calculate the total cost of the project which is equal to the cost of software plus the cost of the computers. Find the markup percentage calculation example below.

$2,000 + ($600*25) = $17,000

Step 2

Then, Glen must find his selling price by using his desired markup of 20% and the cost calculated for the project. The formula to find the sales price is as follows:

Sales Price = (Cost * Markup Percentage) + Cost
or
Sales Price = ($17,000 * 20%) + $17,000 = $20,400

In conclusion, Glen must charge the company $20,400 to earn the return desired on cost. This is the equivalent of a profit margin of 16.7%. For a list of markup percentages and their profit margin equivalents scroll down to the bottom of the Margin vs Markup page, or you can find them using the above markup formula. Using what you’ve learned the markup percentage calculation, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.

markup percentage calculation, Markup Percentage

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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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markup percentage calculation, Markup Percentage

(Originally published by Jim Wilkinson on July 24, 2013.)

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Should You Use Margin or Markup Percentage for Pricing?

The biggest struggle in maintaining or improving profitability often comes down to pricing.  Two of the most common methods companies use to price their products are margin and markup.  Unfortunately, many people think they’re pricing their products based upon a desired margin, but they’re really using markup.  There is a major difference between the two methods and their impact on your bottom line.

markup percentageThe Problem With Markup

Markup is commonly used to find the price of retail products which are somewhat of a commodity; costs are fixed and the market dictates purchasing price. Let’s explore what happens when you use markup as your primary reference for pricing.

Calculating Markup Percentage

Markup Percentage is the percentage difference between the actual cost and the selling price.

The formula for markup = selling price – cost. 

The formula for markup percentage = markup amount/cost.

Let’s say I owned a t-shirt company, and the unit cost of a t-shirt is $8. I want to sell it for $12. The retail markup would then be $4 because:

Retail markup = selling price – cost = $12 – $8 = $4.

The retail markup percentage is 50%, because

$4/$8 = .50

How Using Markup Can Hurt Your Business in the Long Run

Markup is the difference between the actual cost and the selling price.  Since it is generally market-driven, it often fails to take into account a lot of the indirect costs associated with the product. Setting prices in terms of a particular markup can be dangerous unless the markup has been calculated in a way to consider all product costs – direct and indirect.

Are your sales suffering because of pricing issues?  Check out our Pricing for Profit Inspection Guide to improve your pricing strategies.

Gross Margin Percentage

With our clients, we recommend using gross margin (or profit) percentage for a number of reasons. It is more reliable and accurate, and we can easily see the impact on the bottom line.

Calculating Margin

As mentioned before, gross margin is:

Sales – Cost of Goods Sold (COGS). 

We then find the gross margin percentage, which is:

(Gross Margin/Sales Price) X 100.

Based on these calculations, how do we determine the selling price given a desired gross margin? It’s all in the inverse (of the gross margin formula, that is). By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.

Margin Percentage Example

For example, Steve charges a 20% markup on all projects for his computer and software company which specializes in office setup. Steve has just taken a job with a company that wants to set up a large office space. The total cost needed to set up the space with computer and the respective software is $18,000. With a markup of 20% the selling price will be $21,600 (see how to calculate markup above). The margin percentage can be calculated as follows:

Margin Percentage = (21,600 – 18,000)/21,600 = 16.67%

Margin vs Markup

As you can see from the above example, a 20% markup will not yield a 20% marginFailing to understand the difference between the financial impact of using margin vs. markup to set prices can lead to serious financial consequences.  In the example above, if Steve were to assume his 20% markup would yield a 20% margin, his net income would actually be 3.3% less than expected. While a 3.3% difference in net income may not seem like much, to many low-profit-margin businesses it can mean the difference between solvency or bankruptcy.

Additionally, using margin to set your prices makes it easier to predict profitability.  Using markup, you cannot target the bottom line effectively because it does not include all the costs associated with making that product.

How to Minimize Margin vs Markup Mistakes

Margin vs Markup Chart

15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit

Conclusion

To sum things up,  markup percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the profit. Markup is not as effective as gross margin when it comes to pricing your product.  Not only should you take into account how much it costs to acquire the product, but you also need to take into account the indirect costs associated with your product in order to ensure you’re selling your products at a price that will result in profit.

If you’re still uncertain about how to price your product or service to be profitable, download the free Pricing For Profit Inspection Guide. This ultimate guide allows you to easily discover whether you have a pricing problem and gives you steps to fix it.

markup or margin

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markup percentage

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Markup Definition

See Also:
Retail Markup Example
Margin vs Markup
Buyer Bargaining Power (one of Porter’s Five Forces)
Supplier Power (one of Porter’s Five Forces)
Marking-to-Market
Free Cash Flow Analysis

Retail Markup Definition

Retail markup is the difference between the price of a product and the cost of that product. Retail markup percentage is the retail markup as a percentage of a product’s unit cost. This method is commonly used to find the price of retail products which are somewhat of a commodity. Costs are fixed, and the market dictates purchasing price. Furthermore, many industries have a standard retail markup percentage which most products are sold at.

The retail markup definition is common to many products, services, and industries. Where retail sales are occurring, it is likely that someone used the retail markup calculator. It is important to note that retail markup, margin, and other comparisons of cost of goods sold and price are not the same.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step guide to maximizing your profits on each side. Get it here!)

Retail Markup Formula

To find the retail Markup amount in dollars: Retail Markup = Sales price – Cost

To find the retail Markup percentage: Retail Markup = Markup amount / Retail Price

Retail Markup Calculation

For example, if a product’s unit cost is $10 and its retail price is $15, then the retail markup is $5:

Retail markup = Retail price – Unit cost = $15 – $10 = $5

and the retail markup percentage is 50%:

Retail markup percentage = (Retail markup/Unit cost) = ($5/$10) = 50%.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Markup Definition

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Markup Definition

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Product Pricing Strategies

How you price your products and services can have an impact on your profits. Check out the following video for our product pricing strategies:

Product Pricing Strategies

The following are descriptions of standard pricing strategies.

Cost-Plus Pricing

Pricing products and services by applying a certain standard markup percentage on top of the total cost of producing the product or service.

MSRP (Manufacturer’s suggested retail price)

Retailers price products based on a suggested price from the product’s manufacturer, which is above the wholesale price paid by the retailer.

Low Price, High Volume

Reducing prices to sell more product. The idea is to compete on price and increase profits through selling a larger volume of products, though margins will be less.

Premium Pricing

Increasing prices for products and services based on an improvement in product quality, and/or additional features and services provided. The idea is to increase profits through selling products and services at higher margins, even though volumes may be less.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Product Pricing Strategies

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Product Pricing Strategies

See Also:

Product Costs vs Period Costs
Segmenting Customers for Profit

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Margin Versus Mark-Up

Communicating simple accounting and finance measures to colleagues can be a challenge. Take, for example, gross profit margin percentage and mark-up percentage or simply margin versus mark-up. To non-finance professionals, these two measures may seem to be interchangeable. But they’re not. Mark-up percentage is generally a marketing measure used in pricing decisions made by marketing professionals. Financial professionals use gross profit margin percentage as a measure when reviewing a company’s income statement.

Margin Versus Mark-Up

Calculate mark-up percentage by dividing a product’s unit cost by the gross profit. You get gross profit by subtracting a product’s unit cost from its sales price and assuming that cost reflects COGS on a per unit basis. Gross profit margin percentage is when you divide the amount of gross profit by sales on the income statement. Compute it on a per unit basis. So the primary difference between the two percentage calculations lies in whether gross profit is divided by cost or by sales. Differences may also exist due to the product costing method you use to determine the cost per unit sold.

It may be helpful to explain to non-finance managers the impact of a prospective price increase in terms of gross profit margin percentage. Then leave out the mark-up measure altogether.

Margin Versus Mark-Up

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