How to Calculate Markup & Markup Percentage?

Tally Solutions | Updated on: May 26, 2023

What is markup?
Why is markup important?
How to calculate markup percentage
Key takeaways: Software to help determine the ideal markup

Markup is of critical importance to a business owner. It can make all the difference to the financial success of the business. It is the markup that determines the profit. Though a business owner can set any markup value, there is a formula that is used to determine this. Understanding how to fix the markup and how to use software tools to make it easier is easy, read on.

What Are Open Market Operations (OMO)?

What Are Profitability Ratios? Definition, Types and Importance

What is markup?

When you see goods or services you have to sell them at a price that is a little more than the cost price. It is only when there is a positive difference between the cost and sales prices that you can make a profit. Anything less would make the business unsustainable or cause a loss.

The difference in the price that you sell your product for and the cost price is the markup. As a markup formula it can be represented as:

Markup = Sales price - Cost price of goods or service

It might be easy to confuse the markup with the profit margin and some people do use the terms interchangeably. The formula for profit margin is:

Profit = Revenue - Cost of goods sold

The profit is how much the company makes when they deduct the cost of the goods or services sold from the revenue. In most cases the amount or percentage may end up being the same. If you observe carefully you will notice that the point of view of the two is different. The markup formula looks at the sale from the cost price point of view and determines how much more to markup that cost price to arrive at the sales price. The profit on the other hand is calculated based on the revenue and how much difference is there between the revenue and the cost of the goods sold. So the intent and points of view are different for the two.

The gross profit margin tells us how much money is made after the product or service is sold. It is the percentage between the price and the revenue. It may sometimes be less than the markup.

On the other hand, the markup is the amount added to the cost before the product or service is sold. It is easier to understand this with an example:

Cost of making a product: $10

Sale price: $12.5

The markup formula is (($12.5-10)/100)x100= 25%

The revenue is (($12.5-10/12.5)) x 100 = 20%

So we can see that there is a difference between markup and profit and how we calculate markup price.

Why is markup important?

Selecting the markup wisely is essential to ensure that your business makes enough money to sustain itself. A business should fix the markup based on the profitability but also with an eye on the competition. Pricing should be competitive when compared to the other competitors in the market as this is an essential factor for business success. But, if the markup is too low in order to stay competitive, the business may be losing money. This will make the business unsustainable in the long run. If the markup is too high, the customer may feel dissatisfied that they spent too much. This may prevent repeat business from the customer and may also impact the reputation of the business.

Determining the markup of each product should not be a one time exercise. The business should always look at the determination of markup as a continually evolving process. It is something that should be fluid to adjust to the different business environments.

If a competitor is having a deep discount sale, the rest of the competitors may also have to calculate markup price with this in mind to stay attractive and competitive. A company that does not maintain flexibility in pricing will be left far behind. If the business finds that they are not making enough through sales, they may have to think about raising the markup percentage to sustain. In order to keep your business competitive you must calculate markup price that makes you enough money. If your business is becoming unsustainable, you should raise the markup to make enough money.

In order to properly calculate markup you must keep track of two factors. One is the competition in the market and the second is the financial health of the business internally. A business that uses a well designed accounting management software will have the data required to track the markup price and its effect on the bottomline of the company. Tally is an accounting software that lets you calculate markup price intelligently by analyzing the historical and current markup data. When this calculation is performed as a scientific exercise, it will be more successful than experimenting with a higher or lower markup.

How to calculate markup percentage

Know that it is industry specific: An accountant could theoretically set a markup value that makes the bottomline look good. But there is always an industry trend or standard that you should be aware of. No business operates in isolation and it is essential to stay relevant to the market trends. A company has to stay competitive by being in line with the general markup in the field. Some industries such as clothing have very generous markups while others such as food and beverages can have a very small markup that has to be carefully managed to stay both profitable and competitive.

Calculate the cost of goods/services: The cost of goods and/or services is more than merely the cost price that was paid for it. There are many other costs and expenses that go into properly calculating the cost of the goods or services. The business would have overheads that are also spent in order to deliver the goods or service. This could include transportation, internet, rent, payroll, utilities etc. If a business does not include these expenses when calculating the markup they may end up making too little revenue to cover the costs. So, when you decide on a markup use the data that you have to determine the actual costs of goods and services. A complete accounting software such as Tally will give you this essential information in seconds.

Strategize: Markup should not be a random or an economical decision alone. It should also stay true to your business strategy and brand. There are certain companies that intentionally have a markup that is generous to set them apart. This is especially true of companies that strategize to build their brand as an exclusive high-end one. Such a company would intentionally keep their markup on the higher end. But a brand or company that markets itself as a highly affordable one would have to keep abreast of the market trends to continually be the most competitively priced product. The markup should be in line with the overall brand image and strategy.

Calculation

It is easy to calculate the markup percentage when you have the numbers that you need. The formula is:

Markup percentage = ((Sales price per unit - Cost per unit)/Cost per unit) x 100

Keep in mind that the difference is taken from the cost point of view and not the revenue point of view. If the revenue is used, it will result in the calculation of the profit margin and not the markup. When you use a software such as Tally that gives you all the details that you need, it is very easy to keep an eye on and adjust the markup value of your goods and services.

Key takeaways: Software to help determine the ideal markup

An accounting software such as Tally is an invaluable tool to correctly calculate markup. Without the right tools, it is tempting to use the revenue amounts and work with profit margins. Tally however makes it straightforward to determine the actual cost of goods while factoring in all the expenses. Another great advantage with using Tally is that you can study the effect that any change in markup has on your business. Perhaps, a lower markup generated more business and the volume generated enough sales and revenue to keep the profits healthy. Or, a higher markup had no change in sales figures but the sales were enough to keep the finances healthy.

Watching the trends is essential to determine the actual effect that any tweak in markup has on the revenue and the profits. Tally allows you to study the bigger picture and drill down to the finer details when you see an interesting trend. This is essential to make informed decisions about fixing and continually tweaking the markup percentage. In the highly competitive business market, this ability to be flexible and responsive to market changes is essential for success. It also bridges all the different aspects of accounting so that they can be managed both individually and together.