Markup is the difference in the amount of money you paid for the product against what your customer paid for it. In other words, it is how much money you charge on top of the original cost of the product.
The simplest example is retail. You bought a can of beans for £0.50 and sold it for £1.00. Your markup is £0.50 or 100%.
But it’s applicable not only to retail of something as tangible as a can of beans. In your books, you can clearly see how much your intangible product costs you, too.
Markup vs Margin
People often confuse these two. They are similar but they refer to different parts of the business. Markup deals only with how much you put on top of the cost of the product to arrive at the selling price. Margin deals directly with profits. The margin shows how much you earn with costs in mind.
Let’s look at the math of both of them:
We see that equations are only slightly different and it’s easy to confuse them. But they are different numbers even in the simplest examples, like the one with beans.
£1.00 - £0.50/£0.50 = 100%
£1.00 - £0.50 / £1.00 = 50%
If we play with the numbers a little more, we can even find how they relate to each other:
What markup should I choose for my product?
Generally speaking, you need to know the market well to determine the amount of cash you can earn on a product.
Pricing is too important to take it lightly. If your price is wrong you end up either not selling for any profit or not selling at all. And to make the task even more difficult, margin and markup are tied together as formulae above show. You can’t just choose one independent of the other.
For retail businesses that sell widely available products, it is usually best to stick with the price that manufacturers recommend for their goods, or Manufacturer Suggested Retail Price (MSRP). If a business goes for a significantly higher price, clients just spend their money in the shop next door and pay the MSRP.
But it doesn’t mean that you can’t still use some tricks to make your offer more attractive. You can sell bundles of stuff. Peanut butter? Add some jelly and bread into a bundle. And when a person comes to buy just peanut butter, you make a relevant suggestion to get the two remaining members of the sandwich trio.
Fortunately, not all products demand that you stick to the MSRP. One of the oldest tricks in the book is the keystone pricing. Basically, it’s just doubling the wholesale price. In other words, it is 100% markup or 50% margin. In retail, it’s common practice with mid-end clothing.
With luxury goods or products that are somehow unique, it is usually too low. Product is not available that widely and is way more desirable. It's a good idea to go higher. By how much needs to be determined by careful analysis of the market.
In the service industry, this rule of thumb applies as well. And the availability of your service affects its benefit too just like in retail.
- Markup is how much you charge a customer on top of what the product cost you;
- Margin is similar, but it is not the same thing;
- Most often the market for your product tells you how much the markup should be.