Markup and margin are measures that businesses use to set and manage prices to maximise profitability. Markup is the amount added to the cost of a product or service to arrive at a price, while margin is the difference between cost and price. Markup and margin are actually the same thing expressed in different ways. Businesspeople generally use markup models for setting prices, while margin is more useful for tracking, analysing and improving the profitability of the products a business markets.
Find the cost of an item. Before you can calculate markup and margin, you must know the product's cost. The cost includes the price paid for an item or materials plus the labour required for processing. Additional expenditures, such as breakage or spoilage, may also be counted as part of cost.
Multiply the cost by the percentage of profit you'd like to make on the product and add the result to the cost to arrive at the price. If you are using a markup of 75 per cent and the cost of an item is £6, the dollar value of the markup is 0.75 (75 per cent) times £6, or £4.80. Add this to the £6 cost to arrive at a price of £11.3.
Businesses use various models to determine the size of the markup, but the principle is the same in all cases.
Calculate margin by subtracting the cost from the price and dividing the remainder by the price. For example, if an item is priced at £16 and the cost is £9, first subtract £9 from £16, leaving £6. Divide by £16 for a profit margin of 0.40.
Margin is the proportion of a price in excess of cost and is usually expressed as a percentage, so multiply by 100 to get the percentage. In this case, the margin would be 40 per cent.
- Occasionally, you may want to work backward and find the percentage markup from the dollar value of an item already priced. To do this, subtract cost from price, leaving the dollar amount that was added to the cost. Divide this amount by the cost and multiply by 100 to express it as a percentage.