Markup Percentage Defined & Free Calculator (2024)

Every smart business owner knows they have to price their products above what it cost toacquire them to realize a profit. The difference between how much a customer pays for anitem and how much it cost the seller to make or acquire is revealed in the markuppercentage. There's no one-size-fits-all markup percentage — many factors are involvedin its determination, including the type of industry, how much competitors are charging andwhat is being sold. Understanding the best way to apply a markup is an important step towardimproving a business's profitability.

What Is Markup Percentage?

Markup percentage measures the gap between what an item costs the seller and the pricecharged to the end customer. The higher the markup, expressed as a percentage of the cost,the more a company makes. For example, if an item costs a business $5 to produce and itsells it for $8, the extra $3 — its gross profit — represents a 60% markuppercentage. (Moreon how to calculate markup percentage soon.)

Markup percentage vs. gross profit margin:

Markup percentage and gross profit margin (orgross margin) are related concepts that measure the same thing in different ways.While markup percentage expresses gross profit (revenue minus cost) as a percentage of thecost, gross profit margin expresses gross profit as a percentage of the price. In otherwords, the markup percentage answers the question, “How much higher is the price thanthecost, percentage-wise?” while the gross profit margin addresses the question,“What fractionof the price is gross profit?” If you know either the markup percentage or the gross margin, you can also calculate the othermeasure.

Key Takeaways

• Markup percentage is the ratio of a product's gross profit to its cost.
• It's most useful for businesses with physical products in industries where pricesare tied to the costs of acquiring more.
• Markup percentages vary by industry and product. There's no golden rule other thanfinding a price that works for both your business and your customers.

Markup Percentage Explained

Markup percentage is most useful when applied to products with discrete marginal costsbecause the calculations are fixed and determinable. (It can apply to services, too.) Themore a business's cost structure depends on direct allocation and high marginal costs,the more markup percentage reveals.

Another important point to understand about markup percentage: There are two ways to increaseit. The first way is to raise prices, the second is to reduce costs. For businesses that buytheir inventory directly from suppliers, the latter could be challenging. But for those thatmanufacture their own goods, production efficiencies can translate directly to bettermargins — thus, higher markups — without having to raise prices.

Why Is Markup Percentage Important?

Markup percentage can reveal a lot about the unit economics of a business — that is,thefinancial numbers pertaining to each individual sale and how they contribute to or constrainthe rest of the business.

Products with small markup percentages, for example, don't leave a lot of room forerrors that could result in monetary losses from wasted inventory, as might occur withoverordering, overproducing or high rates of returns. Businesses with a lot of competitionand/or products for which there are many good substitutes are more likely to have smallermarkups, as the competition can drive down prices. These businesses typically need to be ontop of consumer demand and market share.

Imagine a business that buys milk cartons for $1 and sells them for $1.10 (a 10% markup).Each wasted carton would wipe out the gross profit from 10 other sales ($0.10 x 10 = $1).That business would need to be very confident in its ability to sell most or all of thecartons it orders.

Businesses whose products have a high markup percentage, however, can afford to keep moreinventory on hand and concentrate more on maximizing overall sales than on worrying aboutselling out. For example, sellers of perfume, a product category with famously high markuppercentages, need to make sure the scent a customer wants is in stock if they hope to make asale. Perfume that sells for $50 a bottle might cost the seller only $5, but missing a salebecause a customer's preferred fragrance isn't in stock would be more costly thanstocking an extra unit that goes unsold.

Markup percentages are also useful for comparing the pricing power of different brands. Iftwo companies make similar products of similar quality but one company charges a highermarkup percentage, that may speak to the value of the brand and allows the seller to commanda higher price for reasons such as perceived status.

Markup percentage should be viewed in context with other metrics. A big markup percentagemight indicate that a business is very profitable — but not if its sales are low. Ahighmarkup percentage could also account for costs incurred from factors beyond the item itself,such as advertising and sales costs.

What Is a Good Markup Percentage?

A good markup percentage is one that results in prices customers are happy to pay, plusenough gross profit to keep a business going and growing. Some say a good markup percentageis the highest one you can get away with charging. While that's sometimes true, it isoften a shortsighted strategy that invites competition (setting up a business to be the“badguy” in its new competitors' narratives) and can damage a brand's reputation.

An appropriate markup percentage varies by industry. Most businesses can get a handle on itby talking to customers, analyzing competitors and industry norms and relying on their ownexperience. Generally speaking, commodity products have low markup percentages; brands aremostly interchangeable (think: milk) and competition drives down margins. On the other hand,luxury goods (think: perfume) are easy to differentiate and thus command high markuppercentages. The pricing power in luxury goods is further bolstered where price signaling—equating a higher price to a higher quality product — and conspicuous consumption havemorepower to shape perceptions of status and value.

What Is the Average Markup Percentage?

Given the variations inherent among different industries, average markup percentages aregoing to be ballpark figures, dependent on data that is available and possibly skewed whenthere's a dominant company in the industry. For example, consider retail, where giantslike Amazon and Walmart sell lots of items at low prices with small markups, while manysmaller retailers sell higher priced alternatives with better service. In other words, takeestimates lightly.

With that as a backdrop, here are some examples of average markups by industry:

• Grocery stores operate on famously narrow margins — 1% to 3%peritem is common. Since grocery stores stock many items, there's a lot ofvariation in the markup percentages. But overall, the grocery business iscompetitive, and stores are typically going to have lower markups than, for example,specialty grocery stores.

• Restaurants have a much higher markup percentage than grocerystores. Restaurants typically mark up food prices anywhere from 200% to 400% overwholesale prices — but think of how much goes into overhead. Grocery storecustomerscome to the store to buy food; restaurant customers are there to have food preparedfor them in a skilled and timely manner. Keep in mind that all numbers are averagesof averages: A restaurant may have a 30% markup on a hamburger and a 2,000% markupon a fountain soda, for example.

• Bars have similar markups to those at restaurants, perhaps even alittle higher, though they handle fewer perishable ingredients and havecomparatively lower labor costs. (After all, it doesn't take a team of peopleto mix a drink or open a beer.) Some restaurants that sell alcohol find the foodbrings in the customers, but the drinks pay the bills.

• Retail fashion and clothing items typically have markups between 50%and 100%, but this can vary widely. Brand-name items will typically carry highermarkups, and items bought from intermediary retailers will have two lower-levelmarkups in the chain of transactions — from maker to retailer to customer— thanitems bought directly from a manufacturer.

• Automobiles are typically sold through dealerships. A used carseller that has to buy cars from individuals without much certainty about ever beingable to resell them will have markups in the 20% to 50% range, while a typicalfranchised car dealership that gets new cars from a single manufacturer may have amarkup percentage of 10%. New-car dealerships have more ways to recover value fromcars that aren't selling, and they can also make a good deal of money throughfinancing strategies tied to car purchases.

• Luxury goods and services are an interesting category becausesometimes being expensive is the point. For example, a grocery store couldn'tcharge $1,000 for a box of Oreos, yet a top-tier restaurant can charge an otherwiseoutrageous markup for a meal that makes a person feel special and bestows a sense ofstatus. The wealthiest shoppers tend to be less price-sensitive, so markups onluxury versions of goods can be 10 times or greater the markup on more ordinaryitems in the same product category.

How to Calculate Markup Percentage

Markup percentage is calculated by dividing an item's gross profit by its cost, wherethe gross profit is the item's price (or revenue) minus the cost to produce the item orpurchase it for resale. To put the result in percentage points, multiply by 100.

Markup percentage formula:

Let's revisit the perfume example, where the seller pays $5 for a bottle and charges thecustomer $50. The formula to calculate the markup percentage is:

Markup percentage = [(price - cost) /cost] × 100

Now we simply plug in the variables: [($50 – $5) / $5 ] x 100 = a 900% markup.

5 steps to calculating markup percentage:

Let's “talk” through how to calculate the perfume's markup percentage.

1. Identify how much the perfume cost the retailer ($5).
2. Identify how the retailer plans to price the perfume to sell ($50).
3. Subtract the cost from the price: $50 – $5 = $45.
4. Divide the answer by the cost: $45 / $5 = $9.
5. Multiply the resulting number by 100 to put the answer in terms of percentage points: 9x 100 = 900%.

Example of markup percentage calculations:

Let's say a fast-food restaurant sells a fountain soda for $1, but it only costs 5 centsto make the soda in its machine. The cost is $0.05 and the price is $1.

Markup percentage = [(price – cost) /cost]x 100
[(1 – 0.05) / 0.05] x 100 = 1,900%

That same restaurant sells a $3.99 burger that costs $2.89 in ingredients.

Markup percentage = [(price – cost) /cost]x 100
(3.99 – 2.89) / 2.89 x 100 = 38.06%

Manage Markup With NetSuite

Every SKU sold has its own markup percentage, and those markup percentages change with costsand prices. Keeping track of that in real time can be difficult, and making use of theinformation requires tracking other metrics. While calculating a markup percentage isstraightforward, it’s a lot more difficult to track this data point alongside all theotherinformation needed, on demand and in one place. That's where software can help. NetSuite Pricing Management provides asingle platform where businesses can manage multiple pricing strategies across channels,while also preserving a profit margin.

Conclusion

Markup percentage is a simple metric to calculate, yet when used in conjunction with othermetrics, it can reveal a lot about the unit economics of a business or product wherecost-plus pricing makes sense. It's most easily applied with physical products. Markuppercentage is a metric worth calculating and tracking, as management can use the informationto make strategic decisions to control the health of the business.

Markup Percentage FAQs

How do you calculate markup percentage on a per-unit basis?

Markup percentage is calculated by dividing the gross profit of a unit (its sales price minusits cost to make or purchase for resale) by the cost of that unit. If an item is priced at$12 but costs the company $8 to make, the markup percentage is 50%, calculated as (12– 8) /8.

How do retailers use markup percentage?

A markup percentage is a way of describing the difference between an item's price andits cost to the seller, expressed as a percentage of the cost, including direct labor andoverhead.

How much is a 25% markup?

A 25% markup means that the price of an item to be sold to a customer is 25% higher than thecost to the seller. An item priced at $30 with a 25% markup means the cost to the seller was$24.