What is Markup? Including Free Calculators
If you run a small business, pricing your products or services can be one of the trickiest parts of the job. Charge too little and you risk running at a loss. Charge too much and you might lose customers. That’s where markup comes in — a simple but essential concept that helps you price effectively and stay profitable.
In this guide, we’ll explain what markup is, how to calculate it, how it differs from margin, and why getting it right is crucial for your business success in the UK. Whether you’re selling handmade goods, running a shop, or offering services, understanding markup can help you make more intelligent pricing decisions.
Markup is the difference between the cost of a good or service and the sales price. If a company marks up their goods or services too high, it will struggle to get sales, but if it marks them too low, the business will find it difficult to make a profit. Understanding the markup of a good or service is, therefore, essential.
Pricing markup is expressed as a figure or percentage of the cost. It can be calculated by adding the cost of an item to either your desired markup percentage or markup amount.
We will start by looking at the Markup formula and then break it down into more detail. A markup calculator is included on this page.
What is the Markup Formula?
The markup formula is as follows:
Markup = Selling price – Cost of goods sold
To determine the markup percentage for a particular item, divide its profit (sales price minus the cost of goods sold) by its cost and multiply by 100.
Markup percentage = (Sale Price – Cost)/Cost x 100
Remember that when calculating markup, other business expenses are also involved. General overheads are not included in the formula.
How do I Calculate Percentage markup?
The formula is as follows: Markup percentage = (profit/cost) × 100.
Divide your profits by the costs you’ve incurred. Then you need to multiply by 100 to find the percentage of markup.
For example, The product sells for £150 and costs £125. The markup percentage is 20%, because (£150 – £125) /£125 x 100 = 20%.
To help calculate these figures, we have included a markup calculator on this page.
Selling Price
The selling price is the amount of money a company receives from its customers in return for goods or services sold. Also known as revenue. It’s essential to understand what a selling price means in terms of business and accounting, as it can significantly impact your company’s cash flow, taxes, and even its reputation.
The general formula is Selling price = Cost Price + Profit.
When setting a final selling price, it is essential to consider the competition and ensure competitive pricing. It would be best if you also ensured that there is enough profit to make it worthwhile to sell.
Cost of Goods Sold:
The Cost of Goods Sold (COGS) represents the total cost incurred to produce or sell a product. It includes all business expenses for materials, labour, and factory overhead necessary to build the finished goods sold to customers. The cost of goods sold does not include indirect expenses, such as general business costs, distribution costs, and sales force costs.
Profit Margin
The profit margin is the ratio of Profit to Sales. It also shows how much money a company makes with every pound it brings in. It’s one way of measuring efficiency. The higher the profit margin, the more efficiently the company uses its fixed costs to generate sales.
The formula: Profit Margin = (Net Profit ÷ Revenue) x 100
An example of Profit Margin is when ABC Computers sells a computer for £500 and makes £100 in profit. The margin would be 20% because (100/500) x 100.
A company’s profit margin is one of the key factors that investors consider when deciding whether to invest in a company. The higher the profit margin, the more efficiently a company generates sales and profits from its equipment, materials, and labour investment.
Difference Between Markup and Margin
The difference between markup and margin can be confusing for many business owners.
Markup is a term that refers to the cost of a product or service minus the sale price. If you purchase something for £100 and sell it for £125, your profit would be £25; this represents a 25% markup.
Margin refers to the profit percentage on an item by comparing it with its sales price rather than its purchase price. Using the example above, the margin is 20%.
Markup Percentage vs Gross Margin
Markup is the percentage of a product’s selling price that is above the cost of producing it.
On the other hand, the gross profit margin represents the difference between a product’s selling price and its production cost.
In simpler terms, markup is the amount of money a company charges for a product to cover its costs, while gross margin is the amount left over from sales after accounting for all production costs.
There are several reasons why a company might prefer one measure over the other. For one, markup can be misleading if a company has high production costs. This is because markup measures only how much money a company makes on each sale, not the total amount of money it earns.
Gross profit margin, on the other hand, takes into account all production costs. Additionally, markup can be difficult to calculate if a company has multiple products with varying production costs. Gross margin, however, is easily calculated by simply subtracting the cost of goods sold from total revenue.
Free Pricing Markup Calculator for Small Businesses
We offer two free markup calculators to help you set a retail price. Plug in the numbers, and it will calculate the figures for you.
The first one uses the selling price and markup percentages and will provide the markup and selling price.
The second one uses the selling and cost prices to calculate the markup and markup percentage.
Excel Markup Calculator Template
If you want to calculate the markup price or percentage for lots of different prices or percentages, download our free Excel markup calculator template.
The advantage of using the template is that you can easily see the difference if the cost price changes, or if you want to know the difference if the markup percentage changes.
The example below illustrates the changes in selling and markup prices when the markup percentage or cost price is altered.
Markups in Different Industries
Markups refer to the amount of profit a seller adds to the cost price of an item. Every industry has different markups, but it’s rare for there not to be any variation at all. The type and volume of items being sold have a direct impact on the markup applied to them. So it’s essential to know the markup structure of your industry.
What is Markup Conclusion
Markup is the difference between the cost of an item and its selling price. Calculating markup correctly is crucial because it directly reflects profits, cash flow, and taxes.
It is essential to set the selling price correctly; if it is too high, you will not be competitive in the market. If the price is too low, the business will not make enough profit to survive. Evaluating competitors is a good starting point when determining a price.
