Calculating Markup Percentage

As a small business owner, being able to calculate your markup percentage is very important. The markup percentage represents your profit for each sale after the expenses to bring the product to market are calculated. Determining your markup percentage is not as simple as choosing a profit you wish to make. Quite a bit of research goes into calculating your markup percentage.

Instructions

1. Determine which product you would like to calculate the markup percentage for. Each product that your company produces must be analyzed individually when determining and calculating a markup percentage.

2. Calculate the costs of producing the product and bringing it to market. These include obvious costs such as materials and labor. They also include a portion of your overhead expenses such as rent and electricity. Do not forget to include transportation costs when determining the cost per unit for the product you wish to calculate a markup percentage for.

3. Benchmark against your competition. Research what your competition is charging. Determine based on your own costs what it appears they are using as a markup percentage. Determine if you can reduce your markup percentage to have your item lower than your competition.

4. Analyze the market conditions at the time. If you are selling at a time of a slow market that is in either a recession or even a depression, it is a good idea to lower your markup percentage and make up for this reduction by increasing the number of units sold. In a strong market, you can push your markup percentage higher than the average markup you would usually charge. This is done at a time when the market and the average consumer is thriving.

5. Do the math. Now that you have done your research on your own expenses, the prices and markup your opposition is using, and the health of the market, you can determine your final price by doing the math to calculate your markup percentage.Determine the percentage you wish to use. Say you are looking for a 15 percent profit per unit. Add this percentage to 100 percent. Multiply that total by the total cost you determined per unit for your product. As an example, with the 15 percent mentioned above, you would multiply your product cost for your company by 115 percent. If the cost was $5 to produce, with a 15 percent market, your price based on your markup calculation would be 115 percent times $5, or $5.75 per unit.

Tips & Warnings

• Markup percentages are not a static percentage. They must be adjusted based on the market and your opposition's pricing strategies.

• When reducing your markup percentage on an item, increase your production amount to maintain your level of income.