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Markup is the difference between the cost
Cost

In economics, business, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore....
 of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit
Profit (accounting)

Accounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses....
. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product
Product (business)

The noun product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce from the Latin produce, lead or bring forth....
. Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.






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Markup is the difference between the cost
Cost

In economics, business, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore....
 of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit
Profit (accounting)

Accounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses....
. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product
Product (business)

The noun product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce from the Latin produce, lead or bring forth....
. Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price. Different methods exist in determining the markup of a product.

Initial markup

The initial markup is the average markup required on all products to cover the cost of all items, incidental expenses, and to obtain a reasonable profit. The initial dollar markup is expressed as a percentage. Initial Dollar Markup = (Operating Expenses + Price Reductions + Profit) / (Forecasted Net Sales + Price Reductions)

Example:
  • Forecasted Sales = $380
  • Operating Expenses = $140
  • Anticipated Price Reductions = $24
  • Expected Profit = $38


Thus the initial dollar markup on the product should be 50%. Price reductions, or markdowns, are reductions in the retail selling price when the item cannot be sold at its intended price and erode into profit. Operating expense
Operating expense

An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an on-going cost for running a product, business, or system....
s are costs incurred in addition to the total product cost and can vary depending on the product and service being sold. In reviewing operating expenses, annualized figures should be used since any individual month may not properly reflect the expenses incurred over a full year.

Initial pricing of a product is an important step in merchandising. The Keystone Method doubles cost of an individual product to arrive at its selling price (total product cost x 2). The Dollar Markup Method takes into account the total amount of operating expenses and desired profit. These are then broke down on a per product unit basis, which is then added on to the total product cost. This addition onto the total cost is the dollar markup. This dollar markup is either expressed as a percentage of the total cost per unit or the selling price.

Price determination


Markup as a fixed amount

  • Assume: Sale price = $2500, Product cost is $2000
Markup = Sale price - Cost
$500 = $2500 - $2000


  • Assume the actual sale price was $2200
Markdown = List price - Sale price
$300 = $2500 - $2200
Initial Markup = List price - Cost
$500 = $2500 - $2000
Maintained Markup = Sale price - Cost
$200 = $2200 - $2000

Markup as a percentage

  • Cost x (Markup + 1) = Sale price
or solved for Markup = (Sale price / Cost) - 1


  • Assume the sale price is $1.99 and the cost is $1.40
Markup = ($1.99 / 1.40) - 1 = 42%


  • To convert from markup to profit margin
    Profit margin

    Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue....
    :
Sale price - Cost = Sale price x Profit margin
Margin = 1 - (1 / (Markup + 1))
Margin = 1 - (1 / (1 + .42)) = 29.5%


See also

  • Marketing
    Marketing

    Marketing is defined by the American Marketing Association as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large....
  • Pricing
    Pricing

    Pricing is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and Distribution . It is also a key variable in microeconomic price allocation theory....
  • Cost-plus pricing
    Cost-plus pricing

    Cost-plus pricing is a pricing method used by companies. It is used primarily because it is easy to calculate and requires little information. There are several varieties, but the common thread in all of them is that one first calculates the cost of the product, then includes an additional amount to represent profit....


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