Markup (business)

Price determination

Profit

• Assume: Sale price is 2500, Product cost is 1800 :Profit = Sale price − Cost :700 = 2500 − 1800

Markup

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

or

• cost / .75 = sale price

Aggregate supply framework

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

References

1. Syverson, Chad. (2025). "Markups and Markdowns". Annual Review of Economics.
2. Pradhan, Swapna. (2007). "Retailing Management". Tata McGraw-Hill.
3. Ingels, Jack. (2009). "Ornamental Horticulture: Science, Operations, & Management". Cengage Learning.
4. 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.