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Mark up

How to calculate retail markup for products

Marking up is using a percentage to add to the cost price of your products.

It is a simple calculation and is used when you have multiple products that are at different price points.

The percentage or markup, is based on consideration of:

  • fixed costs
  • desired profit/salary
  • return on any investment.

Once this percentage is calculated, then you can apply it to each of your products.

Case Study

Paul decided that he would stay with the cost-plus pricing strategy because he was able to negotiate a better price with his supplier. Now that Paul’s cost of goods are more stable, he is ready to consider how to apply markup.

  1. Paul needs to estimate his fixed costs for the year ahead will be as follows:

    Overheads (i.e.) Internet/Phone $1,800
  2. He also needs to decide his annual income. To maintain a minimum lifestyle, Paul wants to earn $40,000 a year from the business
  3. Then he needs to choose a return on the original investment (assets, cash) he brought into the business. If you remember, in Step 1.12 Paul invested in his business a total of $12,838 and he wants a return on investment of $3,200 in the first year (almost 25% return).
  4. Based on selling 1,500 units over 12 months with a per unit cost of $30, Paul estimates he will need to purchase $45,000 of stock. The cost of his stock includes the delivery charges, import and custom duties. Assume that at the end of the year, Paul will have no stock remaining because he has sold it all.
  5. This is how Paul will calculate how much revenue he needs to generate

    Paul's Revenue

    Paul needs $90,000 revenue for the year to cover the fixed costs, provide his income and his return on investment as well as the cost of the stock.
  6. Now Paul can calculate his gross profit by calculating the difference between his sales and cost of goods sold.
  7. Gross Profit

The following formula is used for markup

Mark Up Formula

So, therefore Paul will need a:

$$Markup =\frac{45,000}{45,000} x 100 $$
$$Markup = 100%$$

In order for Paul to earn an income of $40,000 per year and achieve a return on his investment of $3,200, he needs to markup his stock purchases by 100%


Discussion

From these calculations, we can see that Paul’s gross profit is only $45,000 if he achieves the sales projection. This was calculated on 100% mark up.

Alternatively, take a look at how to calculate retail markup for products in the Downloads section below.

Do you think this is a reasonable markup for a new start up, or do you believe it should be higher or lower. Share your thoughts in the Comments area.

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This article is from the free online course:

Online Business: Pricing for Success

RMIT University