What is Markup?
Markup is the amount added to the cost price of a product, in order to set the sale price to the end consumer. It is expressed as a percentage of the cost price, and when used to set the initial price of the product is called initial markup (IMU)
Markup Percentage Formula
Markup (%) = (Sale Price – Cost Price) ÷ Cost Price x 100
To calculate the markup percentage subtract the cost price from the sale price and divide the result by the cost price, then multiply by 100 to get the percentage.
Example
If a product costs 70$ and is priced at 100$ the calculation will be
MU (%) = (Sale Price – Cost Price) ÷ Cost Price x 100
MU (%) = (100$ – 70$) ÷ 70$ x 100 = 30 $ ÷ 70$ x 100 = 42.8%
So this product is priced at a 42.8% markup.
How Do You Calculate 20% Markup?
To calculate 20% markup and determine the final price of the product, multiply the cost price by 0.2 (20%) and add the result to the cost price to get the sale price.
Example
If a product costs 50$ and you want to price it at a 20% markup
50$ x 0.2 = 10$
50$ + 10$ = 60$
Another way to calculate 20% markup and get the sale price in one step is to multiply the cost price by 1.2
50$ x 1.2 = 60$
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Markup Calculator Excel
You can apply the same formula that we mentioned here in an excel sheet or simply download this free markup & margin excel calculator from here.
Other Free Online Tools
Use our online markup calculator and calculate selling price using markup percentage. Below is also a list of other retail calculators
Importance
The importance of calculating IMU percentage lies in setting the correct price for your products, that are enough to cover your costs and generate profits, and at the same time keep you competitive in the market.
While the markup in retail is calculated as percentage of COGS only, and does not take into consideration the costs of running the business (i.e Operating Costs), the retailer needs to make sure this spread between the cost price and the retail price is enough to make his business profitable after it is all said and done.
Read Also: How Do Retail Store Make Money?
This does not only mean accounting for operating expenses while setting up your prices, but also considering any kind of markdowns or discounts you are expecting to be giving throughout the year, as this will reduce your maintained MU.
Initial Markup (IMU) vs. Maintained Markup
IMU is the amount you will add to your cost price to set the initial price when you first order your products.
Read Also: Intake Margin
However; since as a retailer you will typically run sale events and promotions, the actual spread between what you bought your products at and what you ended up selling them at will be less than what you have initially set. This is called maintained MU.
Read Also: Intake Margin vs. Realized Margin
This realization is important to understand from the start, in order to set realistic expectations for your end year profit goals in your P&L and also price your products accordingly.
Markup vs. Margin
Both markup and margin calculate the gross profit the retailer gets by selling a product at a certain price.
The only difference between margin & markup is that margin is expressed as percentage of sale price, while markup is expressed as percentage of cost price.
For example, as you can see in this picture, a product that costs 5$ and is priced at 20$ will have a 75% margin and 300% MU.
The spread is the same: 15$
This 15$ is 3 times the cost price (5$) and hence the 300% MU, and only three quarter the sale price (20$) and so the margin is 75%.
Using both terms and formulas is correct in the industry, but in order to have a coherent way of expressing gross profit across pricing, budgeting, buying and in financial statements, we recommend using margins all the time.
Considerations
Some people resort to pricing all their products at a 100% MU or by just doubling the cost price, which is a tactic known as Keystone Pricing.
However; while determining the initial price of a product, there are certain pricing considerations that should be taken into account, before deciding on the right pricing strategy.
- Factors Affecting Retail Prices
- The Different Pricing Methods
- Pricing a Product Portfolio
These considerations include:
- Supply & Demand
- Competition & Entry Barriers
- MSRP: Manufacturer’s Suggested Retail Price
- Promotions & Markdowns
That’s why we don’t recommend going blindly for keystone pricing and instead we recommend formulating a unique pricing strategy for your business that takes all the previous factors into account.
In fact, we recommend using different pricing strategies for different product categories at your store, and together all those categories should be able to deliver your targeted profit goal at the end. We explain this in details in this Retail Pricing Course.
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More Resources
Thank you for reading this article on Markup. We recommend the below free resources as well:
Read more articles on Pricing or join the academy for a set of in-depth courses on pricing a product portfolio and the pre-requisite knowledge needed (Understanding Economics, Branding & Positioning and Consumer Behavior) to develop the right pricing strategies for your business.