Markup – definition and examples
The markup is the amount a seller adds to the cost price of a product to cover overheads as well as profit. The term also refers to the process of correcting text in preparation for printing, as well as the end result. In budgeting, the term refers to a line-by-line review of a budget by a committee. The committee either approves, disapproves, or modifies the budget.
In the United States, a markup is a Congressional committee session at which a bill is put into final form before it goes out.
This article focuses on the meanings of the term when we use it in a business context.
Strategic CFO has the following definition of the term in a retail setting:
“Retail markup is the difference between the price of a product and the cost of that product.”
In other words, it is the difference between the wholesale and retail price.
A wholesaler is a business that sells to shops and other businesses; it does not sell to individual consumers. Retailers, on the other hand, sell to individual consumers.
We can express the markup figure as a fixed amount or as a percentage of the selling price.
When the seller adds 100% to the wholesale price, we call it a keystone markup.
Markup vs. margin
Some people think the term means the same as margin. This is a mistake because their meanings are different.
Margin equals sales minus the cost of the goods that you sold.
Markup, on the other hand, is how much you raised the cost of the product in order to derive its selling price.
Accounting Tools makes the following comment regarding what can happen if we use these terms incorrectly:
“A mistake in the use of these terms can lead to price setting that is substantially too high or low, resulting in lost sales or lost profits, respectively.”
Markup – example
Let’s suppose XYZ Retail sells beds, i.e., it is a bed shop. It buys a bed from the wholesaler for $400 and then sells it to shoppers for $500. XYZ has a gross profit margin of $100.
To find out what the gross profit margin is, see the calculation below:
Gross Profit Margin = Sales Price – Unit Cost = $500 – $400 = $100
To determine what the markup is, in percentage terms, see the calculation below:
Markup Percentage = Gross Profit Margin ÷ Unit Cost = $100 ÷ $400 = 25%
The purpose of working out the percentage is to determine the ideal sales price for XYZ’ beds.
Video – Markup vs. margin
In this video, Brad Flynn explains the difference between the two terms. If you run a business, it is crucial to know the difference, especially when it comes to selling products.
He starts off by talking about percentages.