PFIM Uses Markup to calculate selling price by default.
There is an option to change Markup to Margin in Configuration Company Settings.
However it is vital you fully understand the impact of making this change so here it is explained.
What is markup?
Markup is the percentage increase over the cost price of an item. You add the percentage to the cost price of a product to determine its selling price.
It’s the amount you’re “marking up” the price from what you paid for it.
Markup is calculated by dividing the profit (selling price minus cost) by the cost price and then multiplying by 100.
Markup formula
Markup = ((Selling price – Cost price) / Cost price) x 100
Example, if you sell a product for R100 that costs you R60 to produce, your markup would be:
Markup = ((100 − 60/60) × 100) = 66.67%
This means you’re selling the product for 66.67% more than it cost to produce.
In simple terms
Markup uses the cost price as the base and margin uses the selling price as the base.
Because of this, markup percentages will always be higher than margin percentages for the same item.
Markup percentage or multiplier
Markup is often expressed as a multiplier. For example, the fashion industry standard markup is 2.5.
This is equivalent to 150% markup or 60% margin.
If a dress costs R100 to manufacture, this would be sold for R250.
Common multiple to markup percentages include:
| MULTIPLE | MARKUP | MARGIN |
| 1.25 | 25% | 20% |
| 1.5 | 50% | 33.33% |
| 2 | 100% | 50% |
| 2.5 | 150% | 60% |
| 4 | 300% | 75% |
| 5 | 400% | 80% |
| 10 | 900% | 90% |
How to calculate selling price using markup percentage
Determining the selling price of your products using a markup percentage is a straightforward process.
By adding a specified percentage to the cost of your product, you can ensure that your selling price covers your costs and provides the desired profit.
Here’s a step-by-step guide on how to calculate the selling price using markup percentage:
Determine the cost price
The cost price is the total cost incurred to produce or purchase the product.
This includes manufacturing costs, shipping fees, and any other expenses directly associated with getting the product ready for sale (read below).
Decide on the markup percentage
The markup percentage is the percentage by which you want to increase the cost price to arrive at the selling price.
This percentage should account for your desired profit margin and other indirect costs.
Apply the markup percentage
Use the markup formula to calculate the selling price:
Selling Price = Cost Price + (Cost Price × Markup Percentage)
Alternatively, this can be simplified to:
Selling Price = Cost Price × (100% + Markup Percentage)
How to calculate cost price from selling price and markup
Starting with a selling price and reversing the calculation to determine the cost price is useful if you are thinking of launching a new product.
You can also estimate what your competitors’ cost price might be on comparable products.
If you know the selling price and the markup percentage applied, you can easily reverse-calculate to find the original cost price.
Formula for calculating cost price
Cost Price = Selling Price / (100% + Markup Percentage)
Knowing how to calculate the cost price from the selling price and markup allows you to understand the base cost of your products, enabling you to adjust prices strategically without compromising on profitability.
Accurate cost-price calculations also help to value inventory, budget for future purchases, and manage cash flow effectively.
What is the difference between margin and markup?
Let’s clarify the distinction between margin and markup.
These two terms are so often confused and if you get it wrong, you could be selling goods at a loss.
Markup and margin are both business terms used to refer to profitability, but they calculate profit in slightly different ways.
Understanding both markup and margin is crucial for businesses to set effective pricing strategies and analyze profitability.
Have a look at the differences so that you can ensure you make the right calculations.
| MARGIN | MARKUP |
| The percentage of the selling price that is profit | The percentage added to the cost price to arrive at the selling price |
| Margin = ((Selling Price − Cost Price) / Selling Price) × 100 | Markup = ((Selling Price − Cost Price) / Cost Price) × 100 |
| Calculated based on the selling price | Calculated based on the cost price |
| If a product costs R60 and sells for R100, the margin is 40% | If a product costs R60 and sells for R100, the markup is 66.67% |
| Helps understand the profitability of sales | Helps determine the selling price needed to achieve desired profits |
Why the difference matters
Understanding the difference between margin and markup is important because it affects your pricing strategy and profitability.
- Pricing accuracy: Getting confused between markup and margin can lead to product underpricing, and a reduction in profit.
- Competitive analysis: Markup is useful for product comparison in different industries, to ensure that you are competitively pricing your products.
- Financial analysis: Margin is important for financial reporting, as it directly impacts your profit and loss statements. It also helps you understand the profitability of individual products and overall business performance.
- Pricing strategy: Both metrics are important for strategic planning. Markup is useful for setting initial selling prices, and margin helps to evaluate ongoing profitability.
Markup vs. Margin calculation example
Consider you own a food truck, and you want to set the selling price for a burger.
You know your cost to make the burger is R5.00 and a 50% markup would give you a competitive advantage.
Markup = R5.00 + (R5.00 × 50%) = R7.50
Another way to calculate this is:
- Your cost price = RR5.00
- You want a markup of 50% = R2.50
- Add your markup to the cost price = R7.50
If you want a 50% margin, work backward from the desired margin.
Margin = R5.00 / 50% = R10.00
A 50% margin on a burger costing R5.00 would need a selling price of R10.00
A 50% margin results in a higher selling price (R10.00) compared to a 50% markup on the same burger (R7.50).
This example shows why you need to understand the difference between margin and markup and make sure you get your calculations right.
What do I need to consider when I calculate markup?
When setting your markup, there are several factors to consider to make sure you set a profitable price that covers your costs and is competitive.
1. Cost of goods sold (COGS)
Overhead costs are essential because they relate to all the indirect expenses required to operate your business, failing to account for these costs can result in underpricing (read below).
2. Profit margin
Determine the profit margin you want to achieve.
This involves understanding your business goals to ensure that the markup not only covers costs but also provides a satisfactory profit.
3. Market conditions
Analyse the pricing strategies of your competitors. Competitive pricing can help you position your product effectively in the market and attract customers.
High-demand products can typically sustain higher markups, whereas low-demand items might require lower markups to boost sales.
4. Customer perception
Ensure that the markup reflects the perceived value of the product to the customer.
Luxury items can command higher markups due to their perceived value and exclusivity.
Also, consider the target market’s willingness and ability to pay.
Markups should balance profitability with customer affordability to maintain sales volume.
5. Industry standards
Research average markups within your industry to ensure your pricing aligns within your vertical.
This helps in setting competitive prices while maintaining profitability.
6. Product life cycle
For new or innovative products, initial markups might be higher to capitalize on early adopters.
Over time, markups may be adjusted as the product moves through its life cycle.
Adjust markups based on seasonal demand.
Higher markups can be applied during peak seasons, while lower markups might be necessary during off-peak times to stimulate sales.
7. Sales strategy
Factor in planned discounts and promotional activities.
Ensure that even after discounts, the selling price remains profitable.
Consider offering lower markups on bulk purchases to encourage higher sales volumes, which can lead to economies of scale and increased overall profitability.
8. Economic factors
Monitor inflation rates, currency fluctuations, and other economic conditions that might affect the cost of goods and adjust your markup accordingly to maintain profitability.
9. Legal and regulatory requirements
Ensure that your pricing complies with legal and regulatory requirements, avoiding practices that could be considered unfair or deceptive.
Should I include overhead costs in the markup calculation?
Finally, don’t forget to include all your overhead costs when considering your markup.
Your costs of product are not limited to the direct cost of the goods, but also the indirect costs required for the running of the business:
- Direct costs: Include all direct costs associated with producing or purchasing the product, such as materials, labour, and manufacturing expenses.
- Indirect costs: Consider overhead costs such as rent, utilities, salaries, and administrative expenses that contribute to the overall cost structure.
To include overhead costs in your markup calculation, follow these steps:
Calculate total overhead costs
Identify all indirect costs associated with running your business.
This includes rent, utilities, salaries, office supplies, and other administrative expenses.
Determine overhead rate
Allocate overhead costs to individual products or services.
This can be done by determining an overhead rate, which is typically a percentage of direct costs or a fixed amount allocated based on the number of units produced or sold.
Add overhead to direct costs
Combine overhead costs with direct costs to get the total cost of producing or acquiring a product.
If you don’t consider your overhead costs then you could underprice your products with detrimental impact on your business.
Failing to consider your overheads and indirect costs will mean your cash flow will gradually decline and your income might not be enough to ensure you have sufficient cash flow to continue trading.
Once you’ve set your markup, monitoring your revenue and profit is crucial to ensure that the chosen markup is working for you.