Financial Glossary
Markup
Markup is the dollar amount or percentage added to the cost of a product or service to arrive at the selling price: Markup Percentage = (Selling Price minus Cost) divided by Cost, multiplied by 100. It is distinct from margin, which is calculated as (Selling Price minus Cost) divided by Selling Price. A 50% markup and a 50% margin are not the same: on a $100 cost item, a 50% markup yields a $150 selling price (33% margin); a 50% margin requires a $200 selling price (100% markup). Confusing markup and margin is one of the most common pricing errors in owner-operated businesses.
Problem & Application
A marina ship store purchases life vests at $28 per unit and applies a 75% markup to arrive at a retail price of $49. That translates to a gross margin of ($49 minus $28) divided by $49 = 42.9%. The store owner, believing margins are 75%, is surprised when the annual gross margin percentage on retail merchandise comes in at 43%. The confusion stems from using markup as a proxy for margin. To achieve a true 60% gross margin on the same item, the selling price must be $28 divided by (1 minus 0.60) = $70 per unit -- a substantially different price point. Running the math both ways before setting prices prevents the common outcome of pricing that appears profitable on a per-unit basis but fails to cover the overhead costs that gross margin is supposed to fund.
In Short
Markup is a critical component of pricing strategy, helping businesses balance cost, demand, and profit margins effectively.