The markup calculator (alternatively spelled as "mark up calculator") is a business tool most often used to calculate your sale price. Just enter the cost and markup, and the price you should charge will be computed instantly. It can also be used to calculate the cost - in this case, provide your revenue and markup. If you would like a markup percentage calculator, then just provide the cost and revenue. Keep on reading to find out what is markup, how to calculate markup and what is the difference between margin vs markup.

You may also want to try our markup/margin with VAT calculator or the markup/margin with sales tax calculator. Perhaps the plain old VAT calculator and sales tax calculator are to your liking. Don't forget, our markdown calculator does a nifty thing - it shows you what markup or margin you need to set your product at if you want to be able to give a certain discount to a customer, while still maintain a desired level of profitability. The margin with discount is especially helpful when you want to negotiate a price with the customer. Free your mind of math and focus on doing business!

What is markup definition and what is the difference between margin vs markup?

The basic rule of a successful business model is to sell a product or service for more than it costs to produce or provide it. The difference between the cost of a product or service and its sale price is called the markup (or markon). As a general guideline, markup must be set in such a way as to be able to produce a reasonable profit. The markup price can be calculated in your local currency or as a percentage of either cost or selling price.

In our calculator, the markup formula describes the ratio of the profit made to the cost paid. Profit is a difference between the revenue and the cost. For example, when you buy something for $80 and sell it for $100, your profit is $20. The ratio of profit ($20) to cost ($80) is 25%, so 25% is the markup.

Now that you know what the markup definition is, keep in mind that it is easy to confuse markup with profit margin. Profit margin is a ratio of profit to revenue as opposed to markup's ratio of profit to cost. The profit margin allows you to compare your profit to the sale price, not the purchase price. In our example, we would compare $20 to $100, so the profit margin equals 20%.

How to calculate markup?

  1. Determine your COGS (cost of goods sold). For example $40.
  2. Find out your gross profit by subtracting the cost from the revenue. Our product sells for $50, so the profit is $10.
  3. Divide profit by COGS. $10 / $40 = 0.25.
  4. Express it as a percentage: 0.25 * 100 = 25%.
  5. This is how to find markup... or simply use our markup calculator!

The markup formula is as follows: markup = 100 * profit / cost. We multiply by 100 because we express it as a percentage, not as a fraction (25% is the same as 0.25 or 1/4 or 20/80). This is a simple percent increase formula.

When you don't know the profit, but only know how much we paid for an item (cost) and sold it for (revenue), we simply substitute profit for the formula for profit. Profit = revenue - cost. So the markup formula becomes: markup = 100 * (revenue - cost) / cost.

And finally, if you need the selling price, then try revenue = cost + cost * markup / 100. This is probably the most common scenario - you know how much you paid for something and your desired markup, and therefore want to find the sale price.

Go ahead and try to enter different numbers into the markup calculator! Fill in any two fields, and the remaining ones will be automatically calculated.

Markup in price management

One of the most common pricing strategies, the so-called cost-plus pricing, is based on a specific rate of markup that is typical for the particular industry. In this strategy, the entrepreneur or the company determines the price of its products by a percentage markup on unit costs. Therefore, the markup formula is the following:

price = (1 + markup) * unit costs

The reason for the simplicity of this approach is that the markup percentage is set according to what is common in the industry, habits of the company, or rules of thumb. Besides, the price depends only on the markup and the cost of the unit. It disregards any other factors, such as a shift in demand. Therefore, any change in the cost of the unit leads directly to a proportional shift in price.

Merely relying on the typical markup rate and unit costs doesn't require extensive research or analysis which makes the approach very popular: around 75 percent of companies employ a cost-plus pricing method. However, the cost-based approach can have severe disadvantages if the consumers' behavior is neglected. To illustrate this, let's imagine that you make umbrellas. Each umbrella costs $5, and you sell each of them $10 each, according to the chosen markup and unit costs. The demand for umbrella can change very quickly depending on the weather: on sunny days probably only a few customers would buy your product for this price; costing you potential customers and income. However, on rainy days, the demand for umbrellas will rise dramatically. Therefore, customers would pay even more money to get your product so you could change your margin to be significantly larger.

Nevertheless, if you price you goods and services by applying a typical markup on unit costs, you can end up with an optimal price when competitors have similar costs and apply the same markup. Still, taking into consideration the behavior of consumers in a competitive market can help you to optimize the price of a product. In other words, linking markup to the price elasticity of the demand can make your price management more efficient. Besides, it is the marginal cost, the cost added by producing one additional unit of a product, which should be multiplied by the markup ration dependent on market behavior.

Managers in the retail sector are particularly well known for applying the cost-plus pricing scheme and rule of thumb methods. However, markups in retail don't follow a universal pattern. Instead, different markups are applied on distinct products depending on some experience-based principles:

  • The lower the price, the higher the markup percentage should be.
  • If you can shift the inventory quickly, you should probably have a lower markup factor.
  • Lower markup ratios should be used for key-value products where consumers have a stronger price perception.
  • Everyday products should have a lower markup than the special ones.
  • The markup should be adjusted to the competition.

The advent of web-based business models (for instance, YouTube, Netflix) and the sharing economy (Uber, Airbnb) coupled with the opportunities provided by the Internet have had a revolutionary effect on pricing strategies. Since the marginal cost of the products or services of these businesses tends to be zero, the resulting price also tends to be low, which also can contribute to low inflation rates.

If you became curious what are some typical markups rates, read on to get some insight about the average markups in different industries.

Markup by specific industries

Have you ever wonder what the markups are on a product or service you have bought or are planning on buying? Although there is no universal markup, even within the same category of products, in different industries sellers define markups very similarly. The main reason is the cost structures in a particular sector tend to be similar, so there is little variation between stores. More specifically there is little variation in the unit cost and the marginal cos. As a general rule, where unit costs are low, markups tend to be low as well.

  • Grocery retail usually apply aroundaa 15 percent markup.
  • Restaurants use around a 60 percent markup for food, but it can reach 500 percent for beverages.
  • Jewelry industry typically employs a 50 percent markup.
  • The clothing sector relies on markups between 150 and 250 percent, depending on the brand.
  • Markups in the automotive industry are generally low (5-10 percent); however, for sports cars, they can exceed 30 percent.

It is important to note that high markups do not always mean high profits. For example, the restaurant industry uses relatively high markup ratios, but the profitability of the sector is generally low as the overhead costs are high.

Nonetheless, there are specific products where the sellers may apply unusually high markups:

  • Movie theater popcorn typically has an incredibly high markup - the average is 1,275 percent.
  • Prescription drugs can reach 200 to 5,000 percent markups.
  • Bottled water may have a 4,000 percent markup.
  • Wines/champagnes can be marked up more than 200 percent in restaurants.
  • Greeting cards, college textbooks, eyeglass frames, and bakery goods also have excessive markups.

Other considerations

This markup calculator was one of our first financial calculators that got a lot of love from our users. It's just one of those tasks that salespeople have to perform often - they enjoy the flexibility of our tool (and the fact that they don't have to know how to find markup).

References

  • Scarborough, N. M. and Cornwall, J. R.: Essentials of Entrepreneurship and Small Business Management. Global Edition. Pearson Education Limited (2016).
  • Simon, H. and Fassnacht, M.: Price Management - Strategy, Analysis, Decision, Implementation. Springer Nature Switzerland AG (2019).
  • Simon, H.: Confessions of the Pricing Man - How Price Affects Everything. Springer International Publishing Switzerland (2015).
  • https://www.inc.com/encyclopedia/markup.html
Mateusz Mucha and Tibor Pal - PhD candidate.

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