Markup is essentially the amount added to your production cost price to arrive at a price. It is a commonly used technique to add a consistent profit margin to your product prices.
A very basic markup formula looks something like this:
This markup formula may look a little complex on first glance, but it’s really quite straightforward when you break it down:
Base Manufacture Cost
The first part is your Base Manufacture Cost (otherwise known as your “Cost Price”). This is your actual production cost to make the product and usually includes just materials. If you were to sell your product at cost price you would make zero profit (…and may even make a loss as you haven’t factored in sale costs and overheads!). More details on how to calculate your Base Manufacture Cost can be found here ».
The next part (Base Manufacture Cost + Markup) is where the actual markup is applied to your base costs. The markup here is a multiplier and results in the actual amount you are adding onto your cost price to get to your price.
The following table shows some example percentage markups and their equivalents as multipliers:
A hugely important thing to note here is that the price you calculate from the markup formula above doesn’t yet factor in labor, overheads or seller fees so you’ll want to ensure that these are added after the markup is calculated to ensure that the markup represents your target business profit margins. Our article about handmade pricing covers these additional factors in depth and gives you a complete pricing formula to use: How to set the right price for your handmade products ».
Examples of pricing markup calculations
Let’s now step through in detail with some examples.
Using the markup formula we have created above, let’s firstly calculate the cost price markup using zero 0% to see what happens:
29 + (29 x 0) = $29
As nothing has been added to the cost price, it remains as $29 - the cost to produce the product.
Now, let’s apply a 150% markup (1.5 multiplier) to see what we end up.
29 + (29 x 1.5) = $72.50
Adding the 1.5 markup gives us a price that allows for a profit of $43.50.
This table gives some further examples on how pricing changes depending on the markup applied:
If you have products that you have priced using a different method, an interesting exercise is to reverse the formula to also find out the current markup:
In this calculation, you’ll want to put your current price for Price and your total manufacture cost for Cost. Also ensure that you remove any additional factors like labor, overheads and fees that you may have included.