Markup (business)

For the US legislative term, see Markup (legislation). For other uses, see Markup.

Markup is the difference between the cost of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product. Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price. Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.

Price determination

Markup as a fixed amount

• Assume: Sale price = $2500, Product cost is $2000

Markup = Sale price - Cost

$500 = $2500 - $2000

Markup as a percentage

• Cost x (Markup + 1) = Sale price

or solved for Markup = (Sale price / Cost) - 1

or solved for Markup = (Sale price - Cost) / Cost

• Assume the sale price is $1.99 and the cost is $1.40

Markup = ($1.99 / 1.40) - 1 = 42%

or Markup = ($1.99 - $1.40) / $1.40 = 42%

• To convert from markup to profit margin:

Sale price - Cost = Sale price x Profit margin

therefor Profit Margin = (Sale price - Cost) / Sale price

Margin = 1 - (1 / (Markup + 1))

or Margin= Markup/(Markup + 1)

Margin = 1 - (1 / (1 + .42)) = 29.5%

or Margin = ($1.99 - $1.40) / $1.99 = 29.6%

Aggregate supply framework

P = (1+μ) W. Where μ is the markup over costs. This is the price setting equation

W = F(u,z) Pe . This is the wage setting relation. u is unemployment which negatively affects wages and z the catch all variable positively affects wages.

Sub the wage setting into the price setting to get the aggregate supply curve.

P = Pe(1+μ) F(u,z). This is the aggregate supply curve. Where the price is determined by expected price, unemployment and z the catch all variable.

See also

• Cost-plus pricing
• Marketing
• Pricing