How to Determine Markup and Margin

Retail business owners set prices based on market factors, including supply and demand. Small businesses operating online have a wide reach, and brick and mortar locations may offer mail-order sales or local purchasing. Markups indicate the percentage that the selling price exceeds costs of production. Margins show what amount of profit comes from the selling price of the item. Business owners should understand the calculations behind markup and margin to evaluate sales, pricing and growth.

Instructions

Markup

1. Subtract the total cost for item production from the selling price. The selling price, or retail price, represents the charge to the end consumer. The total production cost should contain materials, labor and shipping if the buyer does not pay these separately. For example, an item costing $10 retail might have a production cost of $8. The figure after subtraction equals $2.

2. Divide the figure obtained in step 1 by the total production cost. This results in a fraction, or decimal notation, that represents the markup. $2 divided by $8 provides a result of 0.25 or 1/4.

3. Multiply the fraction by 100. Markups typically appear as a percentage, such as 28%, instead of in decimal or fractional forms. This makes the calculation easier for laymen and investors to understand. The final markup percentage for the example above is 25%.

Margin

1. Subtract the total cost of production from the retail price. The first step is the same for both markup and margin. Using the same example results in the same figure for this step.

2. Divide the figure by the total selling price. Unlike markup, margins are based on the amount charged instead of the cost to produce. $2 divided by $10 provides a result of 0.20 or 1/5.

3. Multiply the fraction by 100. Margins also appear as a percentage. The final margin percentage for the example appears as 20%.

References

• University of California Los Angeles; "Numbers 101: Markups, Margins and Break Evens"; Richard Rumelt
• The University of Tennessee; "Selling Price, Gross Margin & Mark-Up Determination"; Rob Holland
• National Oceanic and Atmospheric Administration: Frequently Asked Questions Sheet For the Value Added Tab

Resources

• University of Maryland University College: Profit Margin Calculator
• U.S. Small Business Administration