How to calculate markup: a step by step guide with examples
By Indeed Editorial Team
Published 4 July 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Businesses commonly use markup percentage values to determine how much profit their products make by following a simple formula that can help them calculate the markup value on their products. You can also alter the formula to determine other values, such as using your intended markup to determine the price you sell a product at. Understanding how to calculate markup can help you to make better business decisions. In this article, we define what markup is, discuss how to calculate markup and share some examples to guide you.
What is markup?
Markup is simply the amount of profit you make when you sell an item. It's essentially the difference between the amount you pay for an item and the amount you sell that same item for, usually expressed as a percentage. If you buy several goods to manufacture the item you're selling, you factor in all of these costs when calculating your markup. It's important to have a positive markup value, as this means that you're making a profit on your product.
For example, a fashion retailer may sell a jumper for £40. When calculating the costs of all the items used to make the jumper, they realise that the cost is £30. The difference between the cost and the sale price is £10, indicating the profit. The retailer can calculate the markup by considering the ratio of the profit compared to the cost. They divide the profit (£10) by the cost (£30) to find a value of 0.33. If they want to express markup as a percentage, they multiply this value by 100, giving a markup percentage value of 33%.
Related: How to become an entrepreneur
How to calculate markup
You can follow the steps below when learning how to calculate markup:
1. Review the formula
Businesses and individuals use a simple formula to calculate markup. The formula first involves calculating the profit of a product before dividing the profit by the costs to give a decimal value. Because you typically express markup as a percentage, you then multiply this decimal value by 100. The formula for markup value is:
markup value = (profit / cost) x 100
2. Determine the profit
You can simply calculate the profit of your product by subtracting the price of the costs from the final sale price. You factor in the total manufacturing cost of the item, adding the relative price of goods used in the manufacturing price. Make sure to consider any vouchers or promotions that customers may have used when purchasing the product. The formula to calculate profit is:
profit = sale price - cost
3. Divide by the cost
As markup is a ratio of profit to cost, you can then divide the profit value by the cost of the item. Ensure you factor in the total cost of all the goods in the manufacturing process. Make sure to also divide by the cost and not the sale price, as doing this provides the margin profit instead. To calculate markup, you can use this formula:
markup = profit / cost
4. Convert to a percentage
Finally, because businesses typically express markup as a percentage, you can convert this value as such. You can do this by multiplying the value by 100. The formula for this calculation is:
markup percentage = markup x 100
Example: Sale price = £8; Cost price = £4.50
Profit = £8 - £4.50 = £3.50
Markup = £3.50 / £4.50 = 0.78
Markup percentage = 0.78 x 100 = 78%
Determine your selling price with markup
You can rearrange this formula to determine how much to sell an item for. Imagine the retailer is selling a pair of shoes. The manufacturing cost of the shoes was £60 and they want to maintain their 25% markup value. They can divide this by 100 to get 0.25, then multiply this value by the cost to find the profit value. 0.25 multiplied by £60 is 15, so the retailer wants to make a £15 profit and can add this to the cost price to sell the shoes for £75. To calculate the selling price, you can use this formula:
selling price = cost + (markup percentage / 100) x cost
Difference between markup and gross margin
You may wish to understand the difference between markup and margin, as the two concepts are similar. While markup is the ratio of profit to costs, margin is the ratio of profit to sales. You can calculate the margin of an item by dividing the profit by the sale price instead of the cost price.
Imagine that a fashion retailer wants to calculate the margin value of a jumper. The profit remains £10, but they now divide this by the sale price of £40, giving a value of 0.25. Multiplied by 100, this gives a gross margin value of 25%, compared to the 33% markup value.
Examples of markup calculations
Whether you own a small company or act as a chief financial officer, learning how to calculate markup can be a worthwhile skill. You can apply markup calculations to almost any scenario for extra practice. Here are some examples:
Abram owns a deli and recently raised the prices due to poor sales. For reporting purposes, Abram has to find out the exact markup percentage implemented on the products. It costs Abram £50 to buy, prepare and store one whole pig. Abram now sells the full packaged deal of a prepped and ready pig for £75. To determine the markup percentage, Abram uses the formula:
Markup percentage = ((selling price - cost) / cost) x 100
Markup percentage = ((75 - 50) / 50) x 100
Abram solves the difference between 75 and 50, getting 25. Abram divides this by 50, getting 0.5. To change the decimal to a percentage, Abram multiplies it by 100. Abram discovers that they marked up the packaged deals by 50%.
A mid-sized computer accessories manufacturer just received an order for 100 headsets and 50 keyboards. Each headset costs £60 and each keyboard costs £35. The keyboards are wireless and require an extra £1000 in total to cover the additional technology. The company appoints Radha, the manufacturing manager, to determine how much to charge to make a 20% profit.
To use the formula, Radha calculates the order's total cost. They begin with the keyboards as they require the added technology. The order requires 50 keyboards and the additional technology costs £1000 in total. To discover the total cost of the keyboards, Radha has to multiply:
Number of keyboards x keyboard cost = total keyboard cost
50 x £35 = £1,750
With the total cost, Radha can add the additional technology cost of £1000. The final keyboard cost amounts to £2,750. They now determine the cost of the headsets. The order requires 100 headsets, with no additional technology requirement. Each headset costs £60 to make. To discover the total cost of the headsets, Radha has to multiply:
Number of headsets x headset cost = total headset cost
100 x £60 = £6,000
To find the total cost of the order, Radha adds both totals. The resulting amount of £1,750 added to £6,000 is £7,750. Radha can now set the formula equal to 20% to determine the selling price:
1. Input cost amount: Radha uses the formula to input the information. Radha sets up the formula to subtract their £2,350 cost from the selling price.
Desired profit = (selling price - cost) / cost
20% = (selling price - £7,750) / £7,750
2. Convert 20% to a decimal: To solve a mathematical equation like this, the percentage converts to a decimal for the next steps to work. You could also convert to a fraction if you wish.
0.2 = (selling price - £7,750) / £7,750
3. Multiply both sides by 10: To balance the equation, Radha mimics what she does on one side on the other.
0.2 x 10 = (Selling Price - £7,750) x 10 / £7,750
In this instance, you can cancel out the 10 and the denominator by removing a 0 from each to simplify the formula. You can then remove 'x 1' as it's redundant.
2 = (selling price - £7,750) / 775
4. Multiply both sides by 775: With the problem simplified, Radha multiplies again.
775 x 2 = 775 (selling price - £7,750) / 775
1,550 = selling price - £7,750
5. Add 7,750 to both sides: With the problem simplified further, Radha adds.
7,750 + 1,550 = (selling price - £7,750) + 7,750
Selling price = £9,300
To make a 20% profit, Radha charges the customer £9,300.
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