How to Calculate Markup Price, Markup Percentage, and Margin
What Is Markup Percentage?
Markup percentage is the amount of the cost paid for an item that you add on to create the selling price. Many retailers use markups to set their selling price. However, some confusion comes in when there is a reference to margin along with markup. A margin is different from a markup.
To explain a markup, let's use an example: Let's say you purchase a box of paper that costs one dollar. You aim for a profit of 50%. By multiplying the cost by 50%, you get $0.50. This is your markup price. Add that to the price that you paid to purchase the box of paper, and now the total is $1.50. This is the selling price of the box of paper. Therefore, your markup percentage is 50%.
What Is Margin?
Margin is defined as the percentage of the final selling price that is profit. To look at margin, let's use the same example: A 50% margin means that half of the selling price is profit. Therefore, using the example above, to get a 50% margin on the box of paper, we would have to sell it for $2.00. If you sold it for $1.50, like in the example above, your margin would only be 33.33% because only 33.33% of the $1.50 sale price would be coming back to you as profit (since you paid $1.00 for the box of paper initially).
How Do Markup and Margin Relate to One Another?
Again, markup is the amount of the cost of the goods you're reselling that you add on to create the selling price. As seen above, a 50% markup is less money than a 50% margin. If you multiply an item's margin by its selling price, you can determine the cost paid for the item. Using the example above, for instance, if we multiply the selling price of $2.00 by the margin of 50%, we arrive at the original cost: $1.00.
In general, retailers use markup to set the selling price of an item, while investors look at profit margin (usually at a total level across all products, not at an individual, product-specific level). The amount of profit that a company is making overall generally determines its success. Therefore, using markup to set the selling price for individual items while calculating an overall profit margin as a whole on total sales works well for many businesses.
How to Calculate Selling Price using Markup Percentage
Before you can determine selling price, or "target price," you must first know your product cost and markup percentage. Then, using the formula below, you can determine the selling price.
Selling Price = (Markup / 100% * Product Cost) + Product Cost
Suppose the cost to make a bag is $20. What is the selling price, if you want a markup of 30%?
Product Cost: $20
Selling Price = (30% / 100% * $20) + $20 = $6 + $20 = $26
In this case, the selling price would be $26, and the markup price would be $6.
You purchase an item for $10, and you want to mark up the price by 40%. At what price you should sell that item?
Product Cost: $10
Selling Price = (40% / 100% * $10) + $10 = $4 + $10 = $14
In this case, the selling price would be $14, and the markup price would be $4.
How to Calculate Selling Price the Faster Way
To calculate selling price the faster way, you can use this formula:
Selling price = (100% + Markup) * Product Cost
Product Cost: $20
Selling Price = (100% + 30%) * $20 = 130% * $20 = $26
Product Cost: $10
Selling Price = (100% + 40%) * $10 = 140% * $10 = $14
How to Calculate Markup Percentage Using Product Cost and Selling Price
To calculate markup percentage, you need to know the product cost and selling price. Then, using the formula below, you can determine the markup percentage.
Markup = (Selling Price - Product Cost) / Product Cost * 100%
If you purchase an item for $15 and sell it for $20, what is the markup percentage?
Markup = ($20 - $15) / $15 * 100% = $5 / $15 * 100% = 33.33%
In this case, the markup percentage would be 33.33%.
If a product costs $10, and you want to sell it for $13, what is the markup percentage?
Markup = ($13 - $10) / $10 *100% = $3 / $10 * 100% = 30%
In this case, the markup percentage would be 30%.
Video: How to Calculate Markup Percentage
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.