Retailers and wholesalers need to consider the issue of markups in their pricing structure, and manufacturers or other product producers need to be aware of the average markup in their industry.
A "markup" is the percentage of the selling price (or sometimes the cost) of a product which is added to the cost in order to arrive at a selling price.
"Markdown" is a percentage reduction from the selling price.
Be aware that there are two different ways to calculate markup — on cost or on selling price. So when you ask someone "what's your markup on that item?" the answer you want is not just "20 percent," for example, but "20 percent of cost" or "20 percent of selling price." In retailing, the industry standard is to compute markup as a percentage of selling price.
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Let's say Joel received a shipment of clocks that he will sell in his gift store. He paid $12.00 for each clock and plans to make $4.00 on each one. The selling price is then $16.00.
The markup percentage on cost = dollar markup (4.00) divided by cost (12.00) = 33%.
However, the markup percentage on selling price = dollar markup (4.00) divided by selling price (16.00) = 25%.
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As a product wends its way through a distribution channel, each step along the journey adds a markup before selling the product to the next step.
Here's an example of how markups work based on selling price:
| Level |
Category |
$ |
% |
| Producer |
Cost |
20.00 |
80.0 |
|
Markup |
5.00 |
20.0 |
|
Selling Price |
25.00 |
100.0 |
|
| Wholesale Outlet |
Cost |
25.00 |
71.5 |
|
Markup |
10.00 |
28.5 |
|
Selling Price |
35.00 |
100.0 |
|
| Retailer |
Cost |
35.00 |
70.0 |
|
Markup |
15.00 |
30.0 |
|
Selling Price |
50.00 |
100.0 |
Markups vary widely among industries. For example, average markups (on selling price in these cases) are 14 percent on tobacco products, 50 percent on greeting cards, 8 percent on baby food and often more than 50 percent on high-end meats.
Markups, like all pricing strategies, depend on three influences — cost, competition, and demand.