Calculate Markup from ‘Cost Price’ & ‘Gross Margin’

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Calculate Markup from ‘Cost Price’ & ‘Selling Price’

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What is Markup? it’s definition

Markup is the difference between the cost price and selling price of goods or service. The markup amount is expressed in percentage above the actual cost.

Markup = {Selling Price-Cost Price} 

Alternatively, markup is the addition of price to the overall cost of the goods or service, and this is done to cover up the business operation or operating expense and to generate a profit.

How to Calculate Markup?

Markup percentage can be calculated using this formula

Markup\, \% =\dfrac {Selling Price-Cost Price}{Cost Price} \times 100

For example,

If the Cost Price(CP) of a product is $100, and the Selling Price(SP) is $125,

The markup percentage can be calculated as,

Markup\, \% =\dfrac {125-100}{100} \times 100

 

Markup = 25 \, \%

 

Difference between Markup and Margin

Markup and margin are used interchangeably, and many people often get confused by these two terms.

Markup is the amount that is added to the cost of a product to make a profit. It can be determined by subtracting the SP with CP or dividing the profit by cost. Margin, which is also known as gross margin, is calculated as – profit divided by revenue or revenue subtracted by the cost of goods sold.

The differences can be explained using the below image.

Difference between markup and margin

 

How to use Markup Pricing?

 

  • It can be said that the task of calculating the markup is pretty simple, but it should not be overlooked.
  • There would be less or no sales if the price is too high, and there will be no profit if the price is low.
  • Deciding a markup percentage is a crucial factor and a considerable responsibility for the business owners. It is one of the deciding factors of the success of a business, especially for the starters.

 

markup usageMarkups are added by considering several factors. In addition to the wholesale price that you pay for the products, there are other factors that are equally important when adding a markup.

The factors which must be taken into account involves

    • Transportation or Shipping costs
    • Managing the store and
    • Labor costs if it is involved.

Another major factor is the relevance of price.

 

The price of your products must be at par with your competitors who are selling similar products.It can cause a heavy toll on your business if the market is price-sensitive.

 

For this reason, it is highly recommended that you be aware of what others are up to, especially your competitors.

 

When to add a Markup?

If a product is purchased with a purpose, i.e. to make a resale, this is where markup should be added.

It could be a model on which the business is based. By adding an increase, the retailers make a profit, and it is the profit margin.

 

Applications of Markup and its Usage

 

Markups are what every business does, and the significant difference is how they do it.

 

business man on top of successIt depends on how much profit business wants to make.

 

Markup percentage must be more than enough to compensate for the acquisition of the product, each and every expense involved in any form, and administrative cost.

 

It can vary depending on the type of business or industry you’re in.

 

For instance, markup can be very high for those industries that offer unique and fundamentally useful products. It can even soar higher if there are no competitors.

A great way to decide your markup percentage is by observing your competitors’ pricing strategy.

 

The top industries today are; finance, government, manufacturing, business services, education and health care, wholesale and retail trade, information, arts and entertainment, construction, transportation, and miscellaneous sectors.

 

Manufacturers of small appliances and commodities usually use 30% or more as their magic number. Even in the same industry, the number can vary by a huge margin. For example, in the automotive industry, there is a considerable gap between SUVs and smaller commercial cars. Clothing industries enjoy up to 100% markup percentage.

 

Advantages and Disadvantages of Markup Pricing

Advantages

    • It makes easier for businesses to calculate the profit. It also helps the companies to determine how much they will charge for a service or product. This ensures that they don’t suffer loss.
    • This method is practical and straightforward, and it does not require any special skills, anyone can easily make the calculation.
    • It is justifiable, in a sense, that-the suppliers can point out the reasons for the hike in the price of the products.
    • If there is a need to change the pricing, it can be easily achieved as the company or businesses do not require additional information from other parties. It is their data that is used in the entire process. In other words, this method is adaptable to changes.
    • The cost of decision making can be greatly reduced.

Disadvantages

    • A company using this method has to keep an eye on its competitors constantly. The pricing has to be changed; accordingly, this can have a massive impact on the company’s performance. They may often have to lower the price to stay in the game, which may affect the company’s revenue.
    • This method involves a sunk cost (money which cannot be recovered once it is spent) rather than focusing on incremental or opportunity cost. This can have a negative impact too.
    • Markup pricing is decided by few or even a single individual, so needless to say, personal bias is involved.
    • Another limitation of this method is that it does not consider the product’s future demand.

Similar Names of Markup Pricing

    • Retail Markup Pricing
    • cost-plus pricing
    • Markon

Appropriate Markup Percentages for Different Industries

In a world of business, there is no universally accepted “normal markup.” In other words, there is a limit or boundaries. It depends largely on the type of industry you’re in.

 

Majority of the retail grocers usually have about 15% or fewer markups, and excellent restaurants enjoy about 60%, jewelers 50 %, clothing 100-200%, and lastly pharmaceutical a whopping 5000%.

 

However, as mentioned earlier, the markups of any industry depend on several factors, unless there is no competition. The companies without competitors enjoy pretty much unlimited freedom.

Markup Percentage for Top 10 Tech companies

    1. markup for facebook Facebook – 669.23 %
    2. markup for visa Visa – 3233.33 %
    3. markup for verisign Verisign – 488.24 %
    4. markup for alphabet Alphabet – 143.9 %
    5. markup for mastercard Mastercard – 99,900.0 %
    6. markup for apple Apple – 61.29 %
    7. markup for Broadcom Broadcom – 92.31 %
    8. markup for Intuit Intuit – 566.67 %
    9. markup for ebay eBay – 334.78 %
    10. markup for nvidia Nvidia – 150 %