What all you need to know about markup and markup percentage? 

When was the last time a customer paid you, the total amount suggested by the retail price for something? 

This situation is scarce, so setting the base price for a product is vital. So, you must adjust the price to account for the customer and situational differences.

That’s where the markup comes to play. Let’s first understand what markup means. 

What is markup?

When you sell an item, you don’t quote the exact amount you paid in the manufacturing process. So, the gap between the cost of a product or service and its actual selling price is markup.  Markup is the difference between how much you spend on an item and the amount for which you sell. The formula for calculating markup is:

Markup= Sales Price – Cost Price of Goods or Service

Now let’s move to the markup percentage, 

Markup percentage is the money you charge over and above the cost of your product as a percentage of the cost price. So this is the markup formula:

Markup percentage = ((Sales Price – Unit Cost)/Unit Cost) x 100 

Doesn’t the markup seem similar to the gross profit margin? The critical difference is the cost and revenue. 

Markup Vs. Gross Profit Margin

Many experts and business owners often confuse your markup with profit margin. However, the formula for gross profit margin is as follows: 

Gross Profit= Revenue – Cost of Goods Sold

The gross profit margin is the profit divided by the selling price, whereas markup is the profit divided by the cost. The profit is the company’s earnings after deducting the cost of goods sold from the revenue. The difference is in the point of view. 

For instance, the cost of manufacturing a product is $50, and the sales price is $55. 

According to the markup formula- 

Markup is (($55- $50)/ 100) * 100= 5% 

Gross Profit Margin is (($55- $50)/ 55) * 100= 9.1%

The markup formula tells how much your markup will cost so that it reaches the sales price. Whereas profit margin conveys how much money you made after selling the product. 

Read: Profit Margin vs. Markup: What’s the Difference?

Now that you know the meaning of markup pricing, let’s understand its advantage, 

Importance of Markup

• Increases Profit

Markups help you in setting strategic pricing for all goods and services. As a result, you can quickly generate a profit depending on the sales volume. You can easily offset any expense incurred in the production process with the correct markup. 

• Recover Costs

Markup is the potential profit you can earn, which can be used to recover the cost of labor and materials. This way, you won’t get into debt just for producing the goods and services. 

• Easy Calculation

A pricing strategy consists of various essential factors. Markup pricing is one of those. However, we saw above the simple formula for calculating markup price, which makes calculating the markup pricing easy among the other factors.  

What things to consider before calculating markup?

• Trends in Industry Prices 

A thorough research is vital before calculating your markups. As a customer, you also know the industry’s average price of a product, and the same you need to consider while calculating your markup prices. So, if your customers notice your product at a higher price than the competitors, they will buy from another store. 

• Sales Volume

You may observe that the sale of high-sales volume products is more with a low markup. The reason behind this is the low markup, which motivates customers to buy items at affordable costs. 

• Gross Profits

Before calculating your markups, you must be aware of your gross profit. Your gross profit is the extra revenue you get after paying all expenses incurred in making the product. 

• Covering the cost of goods sold

Remember that your markup must cover what you paid to produce the product or service. It must be high enough for the cost of goods sold, including rent, electricity, insurance, business supplies, raw material, freight, storage, production equipment, etc. 

So, these are the few things you must consider before calculating the markup price for your product & services. 

Conclusion

The accounting world has thousands of nitty-gritties, and every accounting term holds essential meaning. To learn more about the meaning of various accounting terms used in accounting, bookkeeping, cash flow management, and payroll by a CFO, stay tuned to SKB Accounting.  

 To learn more about the markup percentage value for every product or service, schedule a call with SKB Accounting now.