Understanding Markup
Markup is the amount added to cost to determine selling price, expressed as a percentage of cost. A product costing $100 with 50% markup sells for $150 - the $50 markup is 50% of the $100 cost. Markup ensures you cover costs and earn profit. Different industries use standard markups: retail often uses 100% (keystone pricing), while commodities use 10-20%.
Markup differs from margin. A 50% markup yields 33% margin ($50 profit on $150 revenue). Confusing these leads to pricing errors. Always clarify which you're discussing. Markup is more intuitive for pricing (add X% to cost), while margin is better for profitability analysis (what percentage of each sale is profit).
Setting markup requires balancing profitability and competitiveness. Higher markup increases profit per unit but may reduce volume if prices exceed market rates. Lower markup boosts volume but requires selling more units to hit profit targets. Consider your cost structure, target market, competition, and business strategy. Premium brands can command higher markups; value brands compete on volume with lower markups.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Markup is profit as percentage of cost. Margin is profit as percentage of selling price. A $100 cost item with $50 profit has 50% markup ($50/$100) but 33% margin ($50/$150). Both describe the same scenario differently.
Depends on industry, competition, and positioning. Retail often uses 50-100%. Luxury goods may use 200-500%. Commodities use 10-20%. Research your industry norms, cover all costs including overhead, and test market acceptance.
Markup = Margin / (1 - Margin/100). A 33% margin equals 50% markup. Or Margin = Markup / (1 + Markup/100). Understanding the conversion prevents pricing errors when people use different terms.
Yes, when selling below cost (loss leader strategy to attract customers who buy other profitable items). Businesses occasionally sell select items at a loss to drive traffic or clear inventory, but can't sustain negative markup across all products.
Cost-plus (markup) ensures profit but ignores customer value perception. Value-based pricing sets prices based on customer willingness to pay. Combine both: use markup as a floor (minimum price) and value-based as ceiling (maximum price).