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Markup (business)

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Markup (or price spread) is the difference between the selling price of a good or service and its marginal cost.^[1] In economics, markups are the most direct way to measure market power: the extent to which a firm can influence the price at which it sells a product or service.^[1]

Markup is often expressed as a percentage over the cost. A markup is added into the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product.^[2] Markup can be expressed as the fixed amount or as a percentage of the total cost or selling price.^[3] Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.

Markdowns refer to the ability of a firm to hold the price it pays for an input below the input's marginal product.^[1]

Price determination

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Profit

[edit]

Assume: Sale price is 2500, Product cost is 1800

Profit = Sale price − Cost^[4]

700 = 2500 − 1800

Markup

[edit]

Below shows markup as a percentage of the cost added to the cost to create a new total (i.e. cost plus).

Cost × (1 + Markup) = 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 × Profit margin

therefore Profit Margin = (Sale price − Cost) / Sale price

Margin = 1 − (1 / (Markup + 1))

or Margin = Markup/(Markup + 1)

Margin = 1 − (1 / (1 + 0.42)) = 29.5%

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

A different method of calculating markup is based on percentage of selling price. This method eliminates the two-step process above and incorporates the ability of discount pricing.

For instance cost of an item is 75.00 with 25% markup discount.

75.00/(1 − .25) = 75.00/.75 = 100.00

Comparing the two methods for discounting:

75.00 × (1 + .25) = 93.75 sale price with a 25% discount

93.75 × (1 − .25) = 93.75 × .75 = 70.31(25)

cost was 75.00 and if sold for 70.31 both the markup and the discount is 25%

75.00 /(1 − .25) = 100.00 sale price with a 25% discount

100.00 × (1 − .25) = 100.00 × .75 = 75.00

cost was 75.00 and if sold for 75.00 both the profit margin and the discount is 25%

These examples show the difference between adding a percentage of a number to a number and asking of what number is this number X% of. If the markup has to include more than just profit, such as overhead, it can be included as such:

cost × 1.25 = sale price

cost / .75 = sale price

Aggregate supply framework

[edit]

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

References

[edit]

^ ^a ^b ^c Syverson, Chad (2025). "Markups and Markdowns". Annual Review of Economics. doi:10.1146/annurev-economics-081624-080143.
^ Pradhan, Swapna (2007). Retailing Management. Tata McGraw-Hill. ISBN 978-0-07-062020-9.
^ Ingels, Jack (2009). Ornamental Horticulture: Science, Operations, & Management. Cengage Learning. p. 601. ISBN 978-1-4354-9816-7.
^ Farris P.W., Bendle N.T., Pfeifer P.E. and Reibstein D.J. (2010). Marketing metrics : The Definitive Guide to Measuring Marketing Performance, Pearson Education.

External links

[edit]

To calculate official website markup Markup Calculator.net

Revisions and contributors Edit on Wikipedia Read on Wikipedia

View on Grokipedia

from Grokipedia

In business, markup refers to the difference between the selling price of a good or service and its cost, typically expressed as a percentage of the cost to determine profitability.^[1] This pricing mechanism allows businesses to cover expenses, generate profit, and remain competitive in the market.^[2] Markup is calculated using the formula: Markup Percentage = [(Selling Price - Cost) / Cost] × 100; for example, if a product costs $10 to produce and sells for $15, the markup is 50%.^[1] Unlike gross profit margin, which measures profit as a percentage of selling price—calculated as [(Selling Price - Cost) / Selling Price] × 100—markup focuses on the cost base, leading to different percentages for the same transaction (e.g., a 25% markup yields a 20% margin).^[3] Businesses apply markup strategically to account for overheads, taxes, and market conditions, with typical rates varying by industry to ensure sustainable operations and pricing flexibility.^[2]

Definition and Concepts

Core Definition

In business, markup refers to the difference between the selling price of a good or service and its cost price, typically expressed as a percentage of the cost price.^[4] This pricing mechanism allows businesses to establish a selling price by adding an increment to the base cost incurred in production or acquisition.^[5] The primary purpose of markup is to cover operating expenses, including both fixed and variable costs, while generating profit for the business. It serves as a measure of the value added by the business through its operations, distribution, and sales efforts. The total cost base to which markup is applied encompasses direct costs, such as materials and labor directly attributable to the product, as well as indirect costs like overhead expenses that support overall operations. Markup can refer to gross markup, applied before deducting overheads, or net markup, after such deductions.^[6]^[7]^[5] The term markup emerged in early 20th-century accounting practices as part of the development of modern cost accounting, which standardized pricing approaches in retail and manufacturing sectors.^[8] In economic theory, markup also reflects a firm's market power, where higher markups often indicate reduced competition, as captured in concepts like the Lerner Index.^[9] Profit ultimately represents the net outcome after all costs are covered by the selling price.

Markup versus Margin

Markup is defined as the percentage increase added to the cost of a product or service to arrive at the selling price, expressed by the formula

\frac{\text{Selling Price} - \text{Cost}}{\text{Cost}} \times 100\%

.^[3] In contrast, profit margin represents the portion of the selling price that constitutes profit after deducting costs, calculated as

\frac{\text{Selling Price} - \text{Cost}}{\text{Selling Price}} \times 100\%

.^[3] The fundamental distinction lies in their bases: markup is cost-centric, measuring the addition relative to the original expense, whereas profit margin is revenue-centric, assessing profitability against total sales.^[10] For instance, a 50% markup on a $100 cost yields a $150 selling price, but this equates to a 33.3% profit margin on the $150 revenue, illustrating how the same transaction yields different percentages depending on the denominator used.^[3] These metrics are interrelated and can be converted using the formula

\text{Markup \%} = \frac{\text{Margin \%}}{1 - \text{Margin \%}}

, where percentages are in decimal form.^[10] To apply this step-by-step: first, express the margin as a decimal (e.g., 33.3% becomes 0.333); second, subtract it from 1 to find the cost proportion of revenue (1 - 0.333 = 0.667); third, divide the decimal margin by this value (0.333 / 0.667 = 0.5), yielding 50% markup. This conversion highlights their mathematical linkage without altering the underlying profit amount.^[10] A prevalent misconception arises when businesses conflate markup and margin, often leading to underpricing by applying a desired margin percentage as if it were a markup, resulting in insufficient profits to cover overheads.^[11]

Calculation and Examples

Formulas for Markup

The basic formula for markup amount is the difference between the selling price and the cost price, expressed as Markup Amount = Selling Price - Cost Price.^[12] The markup percentage, which indicates the markup relative to the cost, is then calculated as Markup Percentage = (Markup Amount / Cost Price) × 100.^[12] This approach stems from the cost-plus pricing model, where the selling price is derived by adding a predetermined markup to the total cost of production or acquisition.^[13] To derive the markup percentage step-by-step from the cost-plus model, begin with the selling price equation: Selling Price = Cost Price × (1 + Markup Percentage / 100), assuming the cost price serves as the base.^[13] Rearrange to isolate the markup amount: Markup Amount = Selling Price - Cost Price.^[4] Substitute into the percentage formula: Markup Percentage = [(Selling Price - Cost Price) / Cost Price] × 100.^[12] In algebraic notation, this simplifies to

M = \frac{P - C}{C}

, where

M

is the markup (as a decimal),

P

is the selling price, and

C

is the cost price; multiplying by 100 yields the percentage.^[13] Variations of the markup formula account for different cost considerations. Gross markup applies to direct costs such as the cost of goods sold, before allocating overhead expenses: Gross Markup Percentage = [(Selling Price - Direct Cost) / Direct Cost] × 100.^[4] Net markup, in contrast, incorporates all costs including overhead and operating expenses: Net Markup Percentage = [(Selling Price - Total Cost) / Total Cost] × 100.^[12] An inverse formula allows deriving the cost price from a known selling price and markup percentage: Cost Price = Selling Price / (1 + Markup Percentage / 100).^[14] When including discounts or taxes, the formula adjusts to reflect net realizable amounts. For discounts, the adjusted markup percentage is Markup Percentage = {[(Selling Price × (1 - Discount Rate)) - Cost Price] / Cost Price} × 100, where rates are in decimal form.^[15] For taxes, if applied post-markup, the effective markup on pre-tax cost remains the base formula, but the final consumer price incorporates tax: Final Price = [Cost Price × (1 + Markup Percentage / 100)] × (1 + Tax Rate).^[15]

Practical Examples

In a typical retail scenario, a store acquires an item for a cost of $1.40 and applies a 42% markup to determine the selling price of $1.99. The markup amount is calculated as $1.99 - $1.40 = $0.59, representing the gross profit before overhead expenses. This step-by-step approach—first identifying the cost, then adding the markup percentage (cost × 0.42 = $0.588, rounded to $0.59), and finally adding it to the cost—ensures the price covers operational costs while remaining competitive.^[16] Consider a wholesale-to-retail chain example where a wholesaler buys inventory for $75 and applies a 25% markup, yielding a selling price to the retailer of $93.75 ($75 × 1.25). The retailer then adds a 40% markup on this acquisition cost, resulting in a final consumer price of $131.25 ($93.75 × 1.40). This layered markup structure allows each party to achieve profitability: the wholesaler's profit is $18.75, while the retailer's is $37.50.^[17] Discounts can alter the effective markup, as seen in a case where a product costs $100 and receives an initial 50% markup for a list price of $150. Applying a 20% discount reduces the actual selling price to $120 ($150 × 0.80), lowering the effective markup to 20% (($120 - $100) / $100 × 100). This adjustment highlights how promotions impact profitability, requiring businesses to forecast sales volume to maintain overall margins.^[15] In the service industry, a consulting firm incurs $800 in labor costs for a project and applies a 60% markup, billing the client $1,280 ($800 × 1.60). The markup amount of $480 accounts for non-billable time, administrative overhead, and profit. This method is common in professional services, where direct costs like labor dominate, and markups typically range from 40% to 80% to ensure sustainability.^[18]

Applications in Business

In Retail and Wholesale

In the retail sector, markups are typically applied at rates ranging from 30% to 100% on the wholesale cost of goods to account for operational expenses such as inventory holding, staffing, and store maintenance. This variability depends on the product category and market dynamics, with higher markups often seen in apparel and specialty goods to ensure profitability amid fluctuating demand. A common approach in apparel retail is keystone pricing, which involves a 100% markup—doubling the wholesale cost—to simplify pricing decisions while covering typical overheads.^[19]^[17] Wholesale operations, in contrast, generally apply markups of 15% to 30% on manufacturing costs, emphasizing high-volume sales to distributors or large buyers for economies of scale.^[20] This lower markup range supports bulk transactions, where profitability derives from transaction volume rather than per-unit premiums. To incentivize larger orders, wholesalers often implement tiered markups, offering progressive discounts for bulk buyers—for instance, reducing the effective markup by 5-10% for orders exceeding predefined volume thresholds.^[21]^[22] Retail and wholesale markups face significant challenges from inventory turnover rates, which influence sustainability; slow turnover increases holding costs like storage and capital tie-up, eroding the intended profit buffer.^[23] Shrinkage, encompassing theft, loss, and administrative errors, further diminishes effective markups by an estimated 1-2% of sales annually across the sector, necessitating robust loss prevention measures to preserve margins.^[24]^[25] Post-2020 supply chain disruptions, including delays and cost escalations, contributed to elevated retail gross margins for many firms, yielding record levels in some categories due to constrained supply and reduced promotions, as noted in industry analyses.^[26] To navigate competitive pressures, retailers and wholesalers employ dynamic markup adjustments, monitoring rival pricing and demand signals to optimize rates without fixed formulas, thereby maintaining market share while protecting profitability.^[27]^[28]

In Manufacturing and Services

In manufacturing businesses, markups are commonly applied to total production costs, encompassing direct materials, direct labor, and allocations for machinery depreciation to ensure recovery of capital investments over time. Typical markup percentages in this sector range from 20% to 50% on these costs, allowing firms to cover indirect expenses while maintaining competitiveness in pricing.^[29] The adoption of just-in-time (JIT) inventory systems further reduces the necessity for higher markups by minimizing holding costs associated with excess stock, enabling leaner operations and more responsive production schedules.^[30] In service-based industries, markups are frequently calculated on direct labor costs, often ranging from 50% to 200% to account for substantial overhead expenses such as administrative support, training, and facility maintenance. For instance, in software development services, billable hours are marked up significantly to reflect the specialized expertise required and to absorb non-billable time spent on project management or business development.^[31] This approach contrasts with retail markups, which focus more on product resale rather than value creation through labor. Manufacturing firms face unique challenges with high fixed costs, such as plant and equipment, which necessitate integrating markup strategies with break-even analysis to determine the volume required for profitability. In services, value-based pricing often results in inflated markups, as charges are tied to the perceived client value delivered rather than solely cost recovery, allowing for premiums on outcomes like efficiency gains or innovation. Sector-specific practices, such as absorption costing, play a key role by allocating fixed and variable overheads to individual units before applying markups, ensuring comprehensive cost coverage in pricing decisions.^[32] These methods tie directly to overall profit objectives by balancing cost absorption with market-driven revenue generation.

Modern Applications

In the digital economy, markup strategies have evolved significantly due to low marginal costs associated with digital goods such as software and media, enabling e-commerce platforms to apply higher markups compared to physical products. For instance, intangible-intensive firms in digital markets often achieve markups exceeding traditional sectors because of near-zero marginal production costs after initial development, allowing scalability without proportional expense increases.^[33] Platforms like Amazon employ algorithmic pricing to dynamically adjust markups, incorporating real-time data on demand, competition, and inventory to optimize profitability, with third-party sellers facing average markups around 34% on top of platform commissions.^[34] This approach contrasts with basic retail applications by leveraging automation for precision, though it builds on core profit maximization principles. Dynamic pricing represents a key modern application, where AI enables real-time markup adjustments based on supply, demand, and external factors. In ride-sharing services like Uber, surge pricing applies multipliers to base fares—typically ranging from 1.5x to 3x during peak times—effectively increasing markups by 50% to 200% over standard rates to balance driver availability and rider demand. Such AI-driven systems can boost profit margins by up to 10% through optimized adjustments, reflecting broader trends in tech-integrated pricing across digital services.^[35] Subscription models in Software as a Service (SaaS) further illustrate contemporary markup practices, where recurring revenue structures allow for high markups on amortized development costs given minimal ongoing variable expenses. Public SaaS companies commonly report gross margins above 70%, with over 60% achieving this threshold in recent quarters, translating to substantial markups that account for churn rates averaging 5-7% annually and support long-term customer retention.^[36] These models prioritize lifetime value over one-time sales, enabling markups that sustain innovation in cloud-based offerings. Recent analyses indicate that AI integration in digital markets has contributed to rising average markups, with dynamic pricing tools enhancing profitability amid concentrated tech ecosystems. For example, app stores operated by Apple and Google maintain standard commission rates of 30% on in-app purchases and subscriptions, effectively imposing a fixed markup that underscores monopoly-like pricing power in mobile distribution.^[37] Studies project AI-driven optimizations could increase overall margins by 2-10% in e-commerce and related sectors by 2025, amplifying scale in data-rich environments.^[38] Behavioral economics plays a pivotal role in modern markup applications through personalized pricing, where consumer data enables tailored adjustments without overt price variation. Firms use insights into purchase history, browsing patterns, and demographics to set individualized markups, exploiting cognitive biases like loss aversion to maximize willingness-to-pay in digital markets.^[39] This data-driven approach, facilitated by AI analytics, allows for nuanced discrimination that enhances revenue while maintaining perceived fairness, as evidenced in e-commerce and subscription platforms.^[40]

Economic Role

Relation to Profit and Pricing

Markup serves as a foundational element in determining profitability by directly linking production costs to selling prices, ensuring that revenues exceed total costs. The core profit formula is expressed as Profit = (Selling Price - Total Cost), where the selling price is calculated as Selling Price = Cost × (1 + Markup Percentage). This approach guarantees that each unit sold contributes to covering both variable and fixed costs while generating surplus revenue.^[41]^[18] In pricing strategies, markup forms the basis for cost-plus pricing, where a fixed percentage is added to the total cost to establish the final price, providing a straightforward method to achieve desired profitability levels. Similarly, target return pricing utilizes markup adjustments to attain a specific return on investment (ROI), with the markup percentage calibrated based on anticipated sales volume and investment costs to meet predefined ROI targets. These strategies enable businesses to maintain consistent profit generation by embedding markup directly into price-setting decisions.^[13]^[42] Markup plays a critical role in profit realization by facilitating the absorption of fixed costs once sales scale beyond the break-even threshold, where the cumulative markup from units sold precisely offsets overhead expenses. At the break-even point, the markup percentage ensures that total revenue equals total costs, with no net profit or loss, allowing firms to cover fixed costs through scaled operations. In competitive markets, markup levels correlate with achievable profit margins; for example, a 25% markup on cost typically yields a 20% gross profit margin, illustrating the proportional relationship where Markup Percentage = (Profit Margin Percentage) / (1 - Profit Margin Percentage). This correlation underscores how appropriate markup sizing supports sustainable profitability in small and medium-sized enterprises (SMEs).^[43]^[44]^[45] However, markup pricing has notable limitations that can undermine profit outcomes if not managed carefully. Excessive markup, or over-markup, often results in prices that deter customers and lead to lost sales volume, potentially reducing overall revenue despite higher per-unit profits. Conversely, under-markup fails to adequately cover costs or generate sufficient returns, eroding profit margins and threatening long-term viability. Businesses must therefore balance markup levels with market dynamics to avoid these pitfalls.^[45]^[46]

Markup in Macroeconomic Models

In macroeconomic models of aggregate supply under imperfect competition, firms set prices according to the equation

P = (1 + \mu) MC

, where

P

is the aggregate price level,

\mu

is the average markup over marginal cost

MC

. This pricing rule emerges from monopolistic competition frameworks, such as the Dixit-Stiglitz model, in which each firm faces a downward-sloping demand curve and optimizes by charging a constant markup determined by the elasticity of substitution between varieties, typically

\mu = \frac{1}{\epsilon - 1}

with

\epsilon > 1

as the elasticity.^[47] The markup introduces a wedge between price and marginal cost, distorting resource allocation and contributing to deviations from full-employment output in the aggregate supply curve.^[48] New Keynesian models integrate markups into the wage-price spiral to explain inflation dynamics. This relation derives from the real marginal cost, which equals the real wage divided by the marginal product of labor: assuming a Cobb-Douglas production function

Y = K^{1-\alpha} L^\alpha

, the marginal product of labor is

\alpha Y / L

, so real MC = (W / P) / (\alpha Y / L) = (W L) / (P \alpha Y). Under perfect competition and constant returns to scale, where the labor share equals \alpha, real MC normalizes to 1. With markup, prices exceed marginal cost.^[49] In these models, sticky prices and wages amplify shocks, with countercyclical markups (rising during recessions due to fixed costs) exacerbating the spiral, as seen in the New Keynesian Phillips curve where inflation responds to marginal cost pressures modulated by

\mu

.^[50] The Lerner Index quantifies monopoly power via markups, defined as

L = \frac{P - MC}{P} = \frac{\mu}{1 + \mu}

, linking the percentage deviation of price from marginal cost directly to the markup rate.^[51] Higher

L

(approaching 1) indicates greater market power, as in concentrated industries where low demand elasticity allows larger

\mu

; empirically, average

L

has risen with aggregate markups, reflecting increased concentration.^[48] Recent analyses, such as Syverson (2025), connect rising markups—driven by digital economy concentration—to macroeconomic effects, including elevated aggregate inflation through persistent pricing power in frontier firms.^[48] In OECD countries, reduced competition may amplify inflationary pressures.^[52] Policy implications include central banks' growing scrutiny of markups to guide monetary responses and inform antitrust efforts, as higher market power dampens transmission of interest rate changes and sustains inflation above target.^[53]

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Markup (business)

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Markup (business)

Price determination

Profit

Markup

Aggregate supply framework

See also

References

External links

Markup (business)

Definition and Concepts

Core Definition

Markup versus Margin

Calculation and Examples

Formulas for Markup

Practical Examples

Applications in Business

In Retail and Wholesale

In Manufacturing and Services

Modern Applications

Economic Role

Relation to Profit and Pricing

Markup in Macroeconomic Models

References

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