You know you need to mark up your products to make a profit. But, how much should you mark products up? You can use the markup formula to find a markup percentage. Calculating markup percentage helps you get the most out of pricing methods.
Products are marked up each time they’re sold. Goods start with a manufacturer. When the manufacturer sells products to a wholesale business, the manufacturer marks them up to make a profit.
Then, the wholesaler sells the products to a retailer. The wholesaler marks the products up to make a profit. In turn, the retailer marks up the product to make a profit off consumers. Products become more expensive as they move up the distribution chain.
Calculating markup percentage
Markup measures how much more you sell products for than their original cost. The greater the markup, the more you keep as profit once you sell the products.
You can use the markup formula to set your products’ prices. You need to know several basic accounting terms to calculate markup. Make sure you understand these three terms before finding markup percentages:
Revenue: Income you earn by selling products. Revenue reflects the money you earn before deducting any costs.
Cost of Goods Sold (COGS): Expenses that go into making your products. Materials and direct labor costs might be included when calculating COGS.
Gross profit: Revenue left over after paying your products’ expenses, or revenue minus COGS.
3 steps to markup percentage
For calculating markup percentage, start by finding your gross profit. Then, find what percentage of the gross profit is the COGS.
Follow these three steps for the markup percentage:
- Step 1: Find the gross profit.
- Step 2: Divide gross profit by the COGS.
- Step 3: Multiply the markup by 100.
Take a look at this example for finding the markup percentage:
You own a furniture store. You sell a chair for for $400. The chair costs you $250.Step 1: Find the gross profit.
$400 – $250 = $150 gross profit
Step 2: To write the markup as a percentage, divide the gross profit by the COGS.
$150 / $250 = 0.6 markup
Step 3: To make the markup a percentage, multiply the result by 100.
0.6 X 100 = 60% markup
The markup is 60%. In other words, you sold the chair for 60% more than what you paid for it.
Markup percentage for your small business
There is no standard markup percentage. Markups vary depending on your industry. And, markups can also range within industries, from business to business.
Some business owners markup products by 100%. A 50% margin is known as keystone, or key. For a keystone margin, you should mark up products by the cost of the item.
For example, a product costs you $100. You want to mark up the product by 100%. For a 100% markup, you raise the price by the cost, or by $100. Then, you sell the product for $200, or $100 more than its cost.
This is what the 100% markup looks like:
Cost of Product = $100
$100 X 100% Markup = $100
$100 + $100 = $200 Selling Price
Setting prices with appropriate markup percentages helps you keep more profit in your pocket. If you don’t learn how to price a product effectively, you could price a product too low or too high.
The goal of business is to make a profit. Many small businesses fail at this because they don’t know how to price services or products, but pricing is the critical element to achieving a profit, a factor that all firms can control.
Knowing how to calculate markup percentage helps you set and meet profitability goals (side note: do you know the difference between profit vs. profitability?). With the markup percentage formula, you can get an idea of how much profit you will make. You can also see how many products you need to sell to meet your goals.
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