How to calculate markup?

There are two ways to calculate markup:

1. By calculating markup rate, which is achieved by subtracting the wholesale cost from the selling price, then dividing that difference by the wholesale cost and multiplying by 100% to show the percentage.
2. By calculating markup on cost, which is achieved by dividing the markup amount by the wholesale cost and then multiplying by 100% to show the percentage.

Let’s review both approaches in detail.

Calculating markup using markup rate

This method involves calculating the markup as a percentage of the wholesale cost:

Steps to calculate markup using this formula: 

1. Determine the selling price of the item and the wholesale cost you pay for it.
2. Subtract the wholesale cost from the selling price – this will be the amount of markup you’ve added to the cost to reach the selling price.
3. Divide the result by the wholesale cost to calculate the markup amount as a proportion of the wholesale cost.
4. Multiply by 100% to express the answer as a percentage, and this is your markup rate.

EXAMPLE
Let’s say your selling price is $20 and a wholesale cost is $10. The markup rate will be ($20 – $10) / $10 * 100% = 100%. This means the selling price is double the wholesale cost.

Calculating markup using markup on cost

This method focuses directly on the markup amount as a percentage of the wholesale cost:
Markup on cost (%) = Markup amount / Wholesale cost * 100%

Steps to calculate markup using this formula: 

1. Determine the wholesale cost and the amount of markup you want to achieve.
2. Divide the desired markup amount by the wholesale cost to calculate the markup as a percentage of the cost.
3. Multiply by 100% to express the answer as a percentage, and this is your markup on cost percentage.

EXAMPLE
Let’s say your wholesale cost is $10 and a desired markup amount is $5, which is a 50% profit margin on the cost. The markup on cost will be $5 / $10 * 100% = 0.5, which is 50%.

Frequently asked questions

How do I choose the right method to calculate markup?

Both methods are valid for calculating markup. The markup rate method might be preferable if you already have the selling price and need to determine the markup rate you’ve applied. The markup on cost method might be useful if you have a desired profit margin in mind and want to calculate the corresponding selling price.

Can markup be negative?

In some scenarios, a negative markup might be strategically employed. This could involve temporarily lowering prices to boost sales volume or clear out excess inventory. 

How does markup relate to pricing strategies?

By calculating markup, businesses can establish selling prices that cover their costs and generate a desired profit.  It’s important to consider both markup and overall market dynamics and customer behavior to set effective pricing strategies.