Markup: What is it and how is it calculated?
Are you looking for an effective pricing strategy to help you maximize your profits? So, probably the markup will be useful to you.
In this article I am going to explain what markup is and why it is an essential tool for any company who wants to remain competitive in today’s market.
It should be noted that the markup is a margin expressed in value and/or percentage, which sometimes refers to cost and other times to price (also called gross margin).
Definition of ‘markup’
I think it would be useful to start explaining what markup is with a elabora, and then talk about each element of the elabora so that you really understand what it is.
The elabora to obtain the sale price of a product is as follows:
In the previous elabora we have three elements, which are the sale price, the cost and the markup.
Being an equation, it is enough to count 2 of its elements to be able to obtain the missing element.
Now I am going to give you a small definition of each element.
What is the sale price?
The selling price, also known as the retail price, refers to the amount of money that a customer pays for a product or service.
In the context of retail business, it is the price at which merchandise is sold to customers, which is higher than cost.
What is the cost?
In fácil terms, cost refers to the amount of money a company pays to purchase goods from a supplier or manufacturer.
Essentially, It is the price that the company pays to acquire the goods that it intends to sell to its customers.
Cost is a key component in determining the profitability of a retail business, since it directly affects the profit margin.
Usually, the lower the cost, the higher the profit margin, and vice versa.
By the way, if we solve the sale price equation, we cánido conclude that to obtain the cost we cánido use the following equation:
What is markup?
Well, we perro say that the markup perro be defined as the difference between the selling price and the cost. Therefore, it is the amount of benefit (utility) that the company obtains with the sale of the merchandise.
Likewise, if we clear the first equation, we perro obtain the elabora to obtain the markup.
The equation is the following:
Difference with utility
Markup is also known as despiadado profit or gross margin.
In English it is called gross profit either gross margin.
Therefore, we perro say that there is no difference, as long as we are talking about gross profit.
By the way, mark-up is not the same as net profit, since you have to remember that net profit no longer includes expenses.
Cost markup and sales markup
Markup is a term often used in finance and business.
It refers to the amount of money that a company adds to the cost of a product or service to obtain benefits (profits).
Basically, if you remember the equations that I gave you before, we perro say that the markup is the difference between the price at which we sell an item and its cost of production or purchase.
So… What is the difference between cost and sales markup?
In order to explain the difference, I have to talk to you first about the ways we have to calculate the markup.
In the book “Business Math” From Cleaves and Hobbs, we perro find that the markup cánido be used based on cost (cost markup), but also based on price (sales markup).
Therefore, we have two main ways of calculating the markup:
- As a percentage of the cost of the item (cost mark-up).
- As a percentage of the item’s sales price (sales markup).
cost markup
The cost mark-up according to Cleaves is “the difference between the selling price and the total cost (fixed and variable)” and cánido be found as “cost-based markup rate”.
Therefore, it is the one that is calculated with the equation that I provided you at the beginning.
That is to say:
Therefore, we perro say that it refers to the value that a company adds to the cost of a product.
The mark-up perro be seen as a percentage increase to try to ensure that a company cánido receive the appropriate amount of gross profit.
Another way of looking at the markup (of costs) is that the markup espectáculos us how much more the sale price (of our product) is than the amount it costs us to genera it.
Example
If a company buys a toy for $5 and adds a 50% markup, it will sell the toy for $7.50.
This is because they added 50% of the cost of $5 (which is $2.50) to the original price of the toy.
Of course I have to emphasize that I gave a very fácil example so that it could be understood better, but that way of putting the price of a product using it is not entirely correct.
This is because if we sell the toy for $7.50, we are not really earning 50%.
But, it is a good way to understand the cost mark-up.
If you want to know why I say it’s wrong, I recommend that you go read the article I did:
sales markup
The markup perro also be calculated based on the sale price of a product.
However, later I am going to give you different exercises so that you cánido really see what the difference is between the two.
So for now you just have to keep in mind that one emplees cost as the basis and the other emplees price as the basis.
Calculate the Markup
Next I am going to espectáculo you two ways in which you perro calculate cost markup.
I am going to use two ways to calculate the mark-up so that you escoge the one that is easiest for you.
First way to calculate the markup
Of course, the first way that we are going to have to calculate the markup is through the equation that I gave you at the beginning.
That is, the following:
second way
Another equation that we cánido use to calculate the cost markup is the following:
Although, it must be clarified that if we multiply the result that this form gives us by 100, we will directly obtain the percentage of benefit that we are obtaining.
The difference will become clearer with the exercises.
Solved Cost Markup exercises
Next, I am going to provide you with some exercises so that you cánido put what you have learned into practice.
The exercises will be solved with the first form and some with the second form.
Exercise 1
A clothing store buys a shirt for $15 and sells it for $27.
What is the markup?
Solution
- Sale price: $27.
- Cost: $15.
Markup = 27 – 15 = 12
The store added $12 (the difference between the sale price and the cost) to the cost of the shirt.
Now, if we want the result as a percentage of the cost, we cánido obtain it as follows:
(12 / 15) x 100 = 80%.
Remember that 12 is the markup and 15 is the cost.
Therefore, the profit margin is 80%.
Exercise 2
A bakery buys the ingredients for a cake for $10 and sells it for $16.
What is the markup?
- Sale price: $16.
- Cost: $10.
Markup = 16 – 10 = 6
To obtain the result in percentage, just do the following: (6 / 10) x 100 = 60%
Exercise 3
A supermarket buys a carton of milk for $1.50 and sells it for $2.
What is the mark-up?
- Sale price: $2.
- Cost: $1.5.
Markup = 2 – 1.5 = 0.5
The percentage is as follows: (0.5 / 1.5) x 100 = 33.33%
Exercise 4
Suppose you sell cakes.
You sell the cakes for $120 and it costs you $70 to genera them.
Well, to know the markup of the example, this time we are going to use the second elabora:
To solve it, we are simply going to use the values given in the example and we are going to obtain the markup.
Now we are going to multiply the result by 100 to get the percentage.
In this example we obtain a markup (percentage) of 71.4%.
Consequently, our selling price is 71.4% more than cost.
Maybe you want to check if what I’m telling you is true.
Come on to check it with a fácil rule of three
If we solve it, we get a result of 171.42, that is, $120 is equal to 171.42%.
Therefore, we get 71.42% more than the cost.
By the way, the result of this example, using the first equation is: 120 – 70 = 50.
Now we are going to obtain the percentage 50/70 = 0.7142 or 71.42%
Therefore, we get the same result with both equations.
Solved sales markup exercises
Next, I am going to give you some exercises solved using the sales markup.
Exercise 1
A bookstore buys a book for $8 and sells it for $12.
What is the sales markup?
Solution
To begin with, we are going to calculate the markup using the first equation (selling price . cost).
Markup = 12 – 8 = 4
Now, to obtain the percentage of sales markup, what we have to do is the following:
4/12 = 0.3333 or 33.33%
As you perro see, now instead of taking the cost (as in the cost markup), what is done is the sale price.
If we solve it as in the cost markup, we would have the following: 4/8 = 0.5 or 50%.
Exercise 2
A toy store buys a toy for $6 and sells it for $7.50.
What is the sales mark-up?
Solution
Let’s get the markup: 7.5 – 6 = 1.5
Now, let’s get the percentage: 1.5/7.5 = 2.2 or 20%
HOW TO FIX THE PRICE OF A PRODUCT WITH THE MARKUP?
What we have been doing so far is obtaining the markup, whether it is sales or cost, however, we cánido also obtain the price of a product.
After all, remember that you only need to clear the first equation to get the price.
To obtain the sale price, we perro use the following equation:
For example, if we wanted to see how much we are going to sell a book for, we must do the following:
Suppose you have a production cost of 50 pesos and we want to earn 20 pesos for each book.
The data we have is:
Therefore, the price of the book is 70 pesos (50 + 20).
If you wanted to know the percentage you are earning, then just do the following: 20/50 =
- Cost markup: 20/50 = 0.4 or 40%.
- Sales markup: 20/70 = 0.2857 or 28.57%.
However, now I am going to espectáculo you an equation that will allow you to obtain the sale price taking into account the percentage or profit margin that you want to earn per product.
Suppose it costs me 50 pesos to make the book and I want to have a profit of 28.57%.
Well, let’s use the following equation:
Therefore, if we substitute the data, we get the following:
He didn’t give me 70 pesos because I didn’t use all the decimals, but I want you to see something.
Now I’m going to get the price as if we want to earn 40%.
Following the previous example, we could see that using the cost markup is not the same as using the sales markup.
Therefore, when setting the price there is also a difference in the utility that is earned.
Which markup really gives us the profit percentage we want? As you perro see in the last two images.
The percentage of sales mark-up gives us the profit that we really want to earn.
Therefore, many times it is the percentage that is used to equipo the prices of the products and that is why, to equipo the price of a product, it is the elabora that I recommend.
Vídeo
I leave you a short vídeo on how to calculate the mark-up.
We hope you liked our article Markup: What is it and how is it calculated?
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