Markup - What is a markup?
Markup in business refers to the process of a retailer adding to the price of a product after purchasing from a manufacturer
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Markups are more than common in the world of business, particularly in retail. A markup is added when, for example, a retailer is selling a product in order to make a profit on the original cost of the product.
The difference between the price that the product is sold for by the retailer and the price that the seller purchased the product for from the supplier is the markup. It is also known as the ‘gross margin of sale’.
Steven runs a small business selling pots and pans retail business. He purchases a range of pots and pans from a supplier at wholesale prices. A particular non-stick wok he purchases at the cost of £12 per unit. In order to make a profit, Steven need to charge more than he paid for each wok. He charges his customers £18 in his online store, a markup of 50%. While this may seem high, it is a common markup percentage for retail products.
When to add a markup
Markups should be added when a product is purchased with the intention to resell as part of the business model. In retail, the markup is where the seller can make a profit for their business.
Markup or margin?
A markup is often confused with a margin, but the two are in fact different. Both involve the cost of the products being sold, and the difference between the seller purchase price and sales price. The markup and the margin are interrelated.
The margin amount refers to the total sales amount less the cost of goods sold. So in the example of Steven, the sales price for a wok would be £18 and the cost of goods sold, £12. In this case the margin would be £6. The margin percentage would therefore be 33%, as the calculation is the margin divided by the sales price.
The markup refers to the amount that is added to the original purchase price in order to make a profit, so in Steven’s case, the markup would be £6. As discussed above, the markup in this example would be 50%.
So how are they different? Essentially, the markup can be used to achieve a certain margin. In this example, to achieve a 33% margin, the product was marked up by 50%. The markup involves the cost, not the revenue like the margin. Because the revenue should be higher than the cost, the percentage of the markup should be higher than that of the margin.
Both can be used in order to develop a pricing system for a business, however, markup-based pricing can result in differences in the pricing due to market fluctuations etc.
Product price and accounting software
In accounting and invoicing software like Debitoor, you can upload your products for easy management and fast invoicing. Details on each product can be saved, including the cost price and the sale price, so you can quickly determine your markup percentage.