- Written By: Mary Elizabeth
- Edited By: Bronwyn Harris
- Last Modified Date: 14 March 2012
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Copyright Protected:
2003-2012 Conjecture Corporation
The cost of a good or service is the amount that the seller pays for it. The markup is the amount added to both cover expenses and secure a profit when the good or service is sold. The markup formula reflects the strategy that the seller employs to determine how much the markup should be. The markup must be distinguished from the margin. While the margin is the percentage of the selling price that is gross profit — overhead would need to be subtracted to find the net profit — the markup is the percentage of the cost that is added to find the appropriate selling price.
The markup formula may be very straightforward or take into account a range of considerations. Depending on the style of business operation, overhead costs could include items such as rent, web hosting, employee wages, utilities, taxes, and maintenance. The desired profit can be higher or lower depending on the type of business and the economic climate, and vary with the customer response and competitor pricing.
A general formula for markup is:
COST x MARKUP PERCENTAGE = MARKUP AMOUNT
COST + MARKUP AMOUNT = SELLING PRICE
To use this formula, the seller determines the desired markup percentage, and everything follows from that.
The keystone markup formula is an example of a very simple approach to markup and presents a different formula. To employ keystone markup, one simply doubles the amount of the cost of an item to determine the retail price. Thus, a $5 US Dollar (USD) item is sold for $10 USD, while a $500 USD item would be sold for $1000 USD. Note that while the formula is consistent —
COST x 2 = SELLING PRICE
— the profit per sale increases with the initial cost of the item. Put another way, the keystone markup method has a 50% margin and 100% markup. Showing this in terms of the general markup formula for the two pricing examples yields:
a) $5 USD x 100% = $5 USD
$5 USD + $5 USD = $10 USD
b) $500 USD x 100% = $500 USD
$500 USD + $500 USD = $1000 USD
Experts recommend against the use of a single markup formula. Instead, adjusting the markup formula used by the categories of goods and services offered is suggested. They also recommend looking at the resulting prices, how they will read to consumers, and how raising the price slightly with the figures in mind would affect profit.
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NathanG
Post 4 |
@Charred - I’ve heard the same thing myself. The oil companies don’t set prices for oil, the market does. When speculating drives the prices up, the companies make a decent profit even if their margins are small.
I can’t give you the actual markup calculation for oil companies, but I think grocery chains have small margins too, at around 1%. |
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Charred
Post 3 |
@David09 - I’ve often heard that the industry with the smallest gross profit margin is oil, believe it or not. I haven’t been able to confirm this, except from speaking with a few friends who work in the industry. The margin is thin because of the costs of research, drilling and exploration. |
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everetra
Post 2 |
@David09 - I think the industry with the biggest markups has got to be jewelry. I know someone who works in the retail business who confided to me that with engagement jewelry, they have markups of 300% to 1,000%. Of course, he didn’t just volunteer that information to me. I had to keep bugging him to give me the average margin formula, and I wasn’t in the market for jewelry at the time.
I’ve heard from other industry insiders that this kind of range is quite reasonable. If you’re looking to buy jewelry, you should definitely shop with this in mind. You can still take a hefty discount while letting the jeweler make a decent profit. |
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David09
Post 1 |
My wife ran a part-time, specialty merchandise business for some time. She sold her stuff through parties, and direct sales. The company she worked with gave her catalogs that showed the retail markup formula for each product. There was usually enough wiggle room for her to offer discounts to her customers and still make a decent profit on her products.
There was also a second catalog that had wholesale markup formula listings. These were the prices she could offer resellers—people who would be willing to buy her products in bulk in order to resell them. Again, the markups were much smaller, but in bulk purchases she still made decent money. |
