Your markup percentage might seem like just one of many numbers to know — but don’t let it get lost in the hustle and bustle of running a business. It has a direct, continuous impact on your company’s bottom line. And over time, you may need to adjust it to generate healthy profits and comfortably cover things like indirect costs and overhead expenses.
Let’s explore what this percentage is, why it’s important, and how you can effectively calculate it to keep your business going strong.
What’s a markup percentage?
The markup percentage is the difference between a product’s cost and its selling price. It’s the amount you add to the cost of goods sold (COGS) to determine how much you should sell a product for. For example, if your production cost for an item is $100 and you sell it for $150, the markup percentage is 50%.
You can’t make a profit — or even cover business expenses — without marking up your products. But it’s up to you to decide on a pricing strategy and how much to add to the COGS. Just keep in mind that a higher markup percentage means a higher profit margin on each unit, assuming your sales volume remains consistent.
The formula for calculating a markup percentage
To get the markup percentage for a product, you first need to calculate the gross profit. This number represents the money you make on a product before deducting any other expenses. Here’s how to calculate it:
Gross profit: Sale price – unit cost
For example, if your sale price is $100 and the unit cost is $80, your gross profit is $20.
Once you know the gross profit, you can use the markup percentage formula to figure out the amount you’re marking up the product:
Markup percentage: (Gross profit / unit cost) x 100
This markup formula is always multiplied by 100 to express the result as a percentage rather than a decimal. Using the dollar amounts in the example above, here’s how the formula would look:
($20 / $80) x 100 = 25%
By understanding and applying this formula, you can effectively calculate markup percentages and make informed decisions about your pricing strategy.
Why finding the markup percentage is important
Here are a few reasons why it’s important to know — and strategically set — each SKU’s markup percentage:
- Profitability: The right markup brings you enough profit on each product to cover expenses and generate a reasonable return on investment (ROI). Too low of a price point could result in a financial loss, while pricing a product too high could lead customers to take their business elsewhere. Balance a price that’s high enough to make profits but low enough to beat competitors.
- Pricing strategy: Markups are about more than just profits. They help you create a holistic strategy that covers all business costs without sacrificing income. For example, if you hold a lot of deadstock, the markup percentage for the items you sell may need to be higher to compensate for storage costs.
- Financial planning: When paired with sales projections, the markup tells you how much revenue to expect. You can use that data to make informed financial decisions.
Markup versus margin: What’s the difference?
While markup and margin are related concepts, they’re not interchangeable. The markup is a percentage of costs, and the profit margin is a percentage of revenue. If your company doesn’t know the difference, you may not correctly price your products — which could result in lost revenue.
Here’s the key distinction:
- You calculate markups based on a product’s cost. The markup tells you how much you’ve added to the cost to arrive at the selling price.
- You calculate margins based on the selling price. The gross profit margin represents the percentage of the selling price that is net profit.
Say you have a product that costs $100 and sells for $150. You can figure out the gross profit using the formula above: Subtract the unit cost from the sale price to get a gross profit of $50.
Then, you can calculate the profit margin. The margin formula is as follows:
(Gross profit / revenue) x 100
Here’s what those numbers look like for the $100 product you sell for $150:
Markup: ([$150 – $100] / $100) x 100 = 50%
Gross profit margin: ([$150 – $100] / $150) x 100 = 33.33%
You mark up the product by 50% and keep 33.3% of the revenue.
What’s a good markup percentage by industry?
There’s no one-size-fits-all answer to this question. The ideal markup percentage varies significantly depending on the industry, product type, and target market. But here are some general guidelines:
- Retail: Markups in retail are usually higher than others because people are often willing to pay a premium for stylish items.
- Niche markets: The more exclusive the product, the higher the markup. Luxury and niche retailers often inflate their prices to reflect the nature of the target audience and demand.
- Food and beverage: Perishable items are more delicate, so their markups skew a bit lower. The food industry also has a lot of competition, meaning companies need lower sale prices to attract customers.
- Manufacturing: Manufacturing companies generally offer lower markups because there are fewer storage and labor costs to cover.
- Service industries: Service-based businesses calculate markups differently, focusing on hourly rates or project fees rather than fixed numbers. This means prices vary greatly.
5 factors that determine how much to mark up
Don’t forget these key considerations when setting your prices.
1. COGS
COGS represents the direct costs of producing or acquiring your products. This figure includes the price of raw materials, direct labor, and any other costs directly tied to manufacturing or purchasing the goods you sell. Your markup needs to be high enough to cover these costs or you sell at a loss.
2. Operating expenses
The indirect costs required to run a business are known as operating expenses. These costs include:
- Rent or mortgage payments
- Salaries and wages
- Marketing and advertising costs
- Utilities
- Insurance premiums
- Office supplies
- Inventory holding costs
Your markup needs to generate enough profit to cover these operating expenses while leaving room for net profit.
3. Desired profit margin
Desired profit margin is the percentage you aim to earn on each product sale. It reflects your financial goals and preferred ROI. Your markup should be high enough to cover expenses and bring in income.
4. Competition
It’s tempting to set high prices and achieve a better profit margin. But if your prices are significantly higher than competitors’, you may struggle to attract and retain customers unless your product offers unique features or benefits that justify the higher price. Look at similar products on the market and find the right balance between bringing in income and staying competitive.
5. Perceived value
Perceived value is all about what your customers believe your product is worth. Brand reputation, product quality, and marketing efforts all influence this perception. A product with a high value can often command a higher price, even if its cost of production is similar to a less-valued product, so do some market research and find out what customers think.
Streamline operations with Fishbowl’s integrated solutions
Understanding margins and markups isn’t the only way to maximize revenue. Implementing inventory and asset tracking solutions can help you send orders out faster and bring in more profits — and it starts with Fishbowl.
Fishbowl is the all-in-one inventory management solution designed to help you control stock, warehouse operations, and manufacturing workflows. The platform also integrates with QuickBooks to promote financial visibility. If you’re ready to take control of your stock and gain end-to-end visibility over your operations, schedule a demo today.