Markup

Markup is the difference between what an item costs you and what you sell it for, expressed as a percentage of the cost. Buy a mug for $8, sell it for $12, and the $4 difference is a 50% markup ($4 ÷ $8). It is the way many shops set prices because it starts from the one number you always know — what you paid.

Markup formulas

A worked example

A hardware shop buys a screwdriver set for $8 and sells it for $14. The markup is ($14 − $8) ÷ $8 = 75%, and the gross margin is $6 ÷ $14 = 42.9%.

The owner decides that items in this category need a 60% gross margin to cover their share of rent and wages. The markup required is 0.6 ÷ (1 − 0.6) = 1.5, or 150%. The new price is $8 × (1 + 1.5) = $20. Checking the result: ($20 − $8) ÷ $20 = 60% margin. The same steps work in any currency.

Now the shop runs a 20% off promotion. The $20 set sells for $16, gross profit drops from $12 to $8, the markup falls to 100% and the margin to 50%. A discount always takes a bigger bite out of profit than its headline percentage suggests, because it comes entirely out of the profit, not the cost.

Why markup matters for a small business

Markup is fast. When a delivery arrives with a new cost on the invoice, multiplying by a fixed factor gives a shelf price in seconds, and staff can do it without a spreadsheet. That speed is why retail, cafés buying in packaged goods and salons pricing retail products often work from a standard markup per category.

The risk is that markup feels generous when it is not. Owners who aim for “50% profit” and add 50% to cost end up with a 33% margin, and may not discover the shortfall until the month’s figures fail to cover the bills. The safest habit is to decide the margin you need first, then convert it to the markup that delivers it, as in the example above.

Common mistakes

• Using markup and margin interchangeably. They are different percentages of different bases; quoting one when you mean the other changes the price.
• Marking up the wrong cost. Use the landed cost — supplier price plus delivery and import charges — not just the price on the catalogue.
• Marking up tax-inclusive costs or prices. Work with costs and prices before sales tax or VAT, then add tax on top.
• One markup for everything. A flat markup ignores what customers will pay and how fast items sell; slow, bulky or fragile items usually need more.
• Not updating prices when costs change. If cost rises and price does not, the markup shrinks silently on every sale.

How markup relates to other terms

Markup starts from the unit cost, which across all items sold adds up to cost of goods sold. The result of your markup choices is your gross profit margin, the number accountants and lenders look at. And when a markup is set too high for what customers will pay, the result is often dead stock: items that never sell at the price on the label.