It is amazing how one simple formula can be so confusing to the average business owner. The formula is markup. It is defined as the dollar amount or percentage of the cost of the item added to the item to equal its sales price. Many entrepreneurs especially those in retail confuse this simple formula with margin. To make this as simple as possible, markup is a function of cost and margin is a function of sales.
Let’s walk through a couple of examples to illustrate these two formulas.
Example One: Markup on Cost
Straight forward, what percentage of the cost do you wish to charge? Let’s say I want a 40% markup on the cost of the item. Whatever the cost, multiply the cost by 40% and add that to the cost to get the sales price. If you paid $100 for the item, the markup is $40, therefore the total sales price is $140.
(Cost * Desired Markup) + Cost = Sales Price
(100 * 40%) + 100 = $140
Example Two: Margin of Sales
Same item is sold above for $140 with a markup of 40%. So what is the margin? Margin equals the sales price less the cost which equals $40. Normally, margin is quoted as a percentage of the sales price. Thus, we then take the margin of $40 and divide that number by the sales price of $140 and we get 28.57%.
Margin = Sales Price – Cost
$40 = $140 – $100
Or as a percentage:
Margin % = Margin/Sales Price
28.57% = $40/$140
This is a really nice website of calculators. Go to http://www.calculatorsoup.com/calculators/financial/markup.php to access the Mark-Up Calculator.
Let’s review the terms used here:
- Markup is the dollar amount on the cost of an item (this term is used when discussing the cost of an item)
- Markup percentage is the % amount on the cost to get to sales price.
- Sales Price = cost plus markup
- Margin in Dollars = sales price – cost (this is the most commonly used format because it is found in the profit and loss statement for the company)
- Margin % = the margin amount (also the markup in dollars) divided by the sales price
Remember, the most common form of communication in the business world when discussing how much a company makes on its product is margin percentage. This is because it is found on the income statement (profit and loss statement). Act on Knowledge.