How to calculate markup

Markup, also written mark-up or mark up, can be stated as an amount or as a share. The markup amount is the selling price minus the cost. The markup share is that amount divided by the cost, which lets you compare items with very different prices. The cost must be more than zero, or there is nothing to divide by.

business.gov.au's glossary defines mark up by that same gap between cost and selling price. It treats a mark down separately, as a price reduction during a promotion, often to move surplus or discontinued stock. A markdown lowers the price; it is not a negative markup.

A markup is only as good as the cost underneath it. For each item, add up what it takes to have it ready to sell:

• the supplier's price, after any trade discount
• freight or delivery charges to get it to you, shared across the units in the delivery
• packaging and labels
• for items you make, the materials and the time spent making them
• any commission paid on each sale.

business.gov.au's pricing guide describes a cost-based approach in which you total the cost of making and supplying a product, naming materials, labour and overheads, then add a markup or margin. Some businesses mark up the direct cost alone and count on the markup to cover overheads; others add a share of overheads first. Either can work, as long as you know which cost the markup sits on.

Subtract the full cost from the selling price, then divide the result by the full cost.

The throw rug earns the largest markup amount, but the candle carries the highest markup on its cost. The vase's low markup is worth checking: it may have been priced before a supplier increase.

To price from a target markup, multiply the full cost by the markup share and add the result to the cost. To price from a target margin instead, divide the full cost by the share of the price left once the margin is taken out. That share must be above zero, which means the target margin has to be smaller than the whole price.

Markup and margin divide the same profit by different figures: markup divides it by the cost, and margin divides it by the selling price. On a sale that makes a profit the price is the larger of the two, so the margin comes out smaller than the markup, even though both describe exactly the same sale.

Markup worked out on the selling price is the same sum as a margin. Supplier price lists, quoting tools and reports don't all use the two words the same way.

To find the markup that delivers a margin you want, divide the target margin by what's left of the price once the margin is taken out, which is 1.00 less the margin. The higher the target, the further apart the two figures sit:

A markup can go past 1.00, which simply means the price is more than double the cost. The margin on that same sale still sits below 1.00, because the profit can't be larger than the price it came from.

To see what margin a markup gives, divide the markup amount by the selling price, which must be above zero, rather than by the cost. In the new product example, the profit on the price set by markup is the markup amount itself; measured against the higher selling price, it is a smaller share.

Whenever a sale makes a profit, the margin is the smaller figure. If someone quotes a target without saying which it is, ask before you price from it.

The markup on a price tag is a plan. The markup a product range actually earned over a month or a quarter comes from the books, and the two can differ. Take the range's sales for the period, after refunds, and its cost of goods sold for the same period. Subtract the cost from the sales, then divide the result by the cost.

If every accessory had sold at its tagged price, sales would have been 18,500.00 times 1.80, or 33,300.00. The missing 2,590.00 is the gap to explain, and these are the places to look:

• markdowns on slow or end-of-season lines
• discounts given at the counter or through a loyalty offer
• freight or packaging that went into cost of goods sold but not into the cost the tags were priced from
• stock that was damaged, lost or stolen: when cost of goods sold is worked out from a stocktake, missing items end up in the cost figure with no sale to match them
• sales recorded against the wrong range, which moves markup from one range to another.

Any period that ends with a stocktake gives the most reliable cost figure. Work out the planned and achieved markups for the same range over the same length of period each time, so you can follow the gap from one period to the next.

Markup is added to the cost to set a price; a markdown takes an amount off that price. The cost doesn't move, so every dollar of a markdown comes straight out of the markup amount. The markup set when stock is first priced is often called the initial markup. What's left after markdowns, discounts and losses is the markup the business actually keeps.

The first markdown took a fifth off the price but a third off the markup amount, because the whole 30.00 came out of the 90.00 markup. Measured against the price, a markdown looks smaller than the share of profit it removes. Before you mark something down, work out the markup that will be left, and check the new price still sits above the full cost. Below that point, each sale loses money.

business.gov.au's pricing guide counts selling unwanted stock among the benefits of offering discounts. Recording each markdown as you make it, with the date and the new price, lets you work out, from the units sold at that price, how much of the gap between the initial markup and the achieved markup it explains.

A markup shrinks quietly when a supplier raises prices and your selling price stays put. Recalculate after each supplier price change, not only at a set time of year.

business.gov.au's pricing guide sets a price check at least once a year and another whenever costs or the market move. It also says competitors' prices are worth knowing but not worth copying exactly, and that any discount you plan should still leave your costs covered.

A markup tells you most when it sits next to your own figures. Useful comparisons are:

• the target markup you set for that product or range, so you can see which lines fall short
• the same product or range last quarter, and in the same quarter last year if your trade is seasonal
• the achieved markup from the books against the markup on the tags, as in the bike shop example
• other items in the same range, as long as every cost is built the same way, with or without a share of overheads.

Other businesses' markups are much harder to compare with yours, because you can't see what their costs include, or whether they mark up on cost at all.

As a routine, recheck an item's markup whenever its cost changes, and work out the achieved markup for each main range every month or quarter, using the same steps each time so the figures stay comparable.

Keep a record of what each price was built from: the supplier invoice or price list, the freight and packaging workings, the markup used and the date the price was set. With those on file, a later check can tell whether a markup slipped because the cost rose, the price was cut, or the cost was never complete in the first place.

A markup spreadsheet needs four columns for each item: full cost, selling price, markup amount (price less cost) and markup on cost (markup amount divided by cost). Make the last formula return a blank when the cost is zero or empty, so a missing cost shows up as a gap instead of an error. Formatting that column as a percentage changes only how the figure looks, not the figure itself.

To price from a target, put each range's target markup in its own cell and work every price from the item's cost and its range's cell. Changing a target then reprices that range at once, and the markup column shows straight away whether rounding a price to a tidy figure has moved it.

If your accounting or point-of-sale software keeps a cost and a selling price for each item, its sales reports by item or category can supply the sales and cost figures for an achieved markup. Check what the cost on each item includes. A cost that leaves out freight makes every markup in the report look higher than it really is.

• Comparing markups across products when some costs include a share of overheads and others don't.
• Reading a margin target as a markup, so every price comes out below plan.
• Applying one markup to every product, so slow lines and fast lines are priced as if they cost the same to hold and sell.
• Rounding a price down to a tidy figure without checking how much markup is left.