What is markup?
Markup is the amount you add to the cost price of a product or service to arrive at its selling price. It is expressed as a percentage of cost — not of the selling price.
If a product costs you $50 to produce and you sell it for $75, the markup is $25. As a percentage of the cost, that is 50% markup. The customer pays $75 but your margin on that sale — profit as a percentage of the selling price — is 33.3%.
This distinction matters. Markup and margin both describe profitability, but they measure it against different baselines. Treating them as interchangeable is one of the most common pricing mistakes small business owners make, leading to systematically underpricing products and services.
The markup formula:
- Markup %: ((Selling price − Cost) ÷ Cost) × 100
- Selling price from markup: Cost × (1 + Markup% ÷ 100)
- Gross profit: Selling price − Cost
What is the difference between markup and margin?
Markup and profit margin both express profitability, but they divide profit by different numbers. Markup divides by cost. Margin divides by the selling price. The same profit figure always produces a larger markup percentage than margin percentage.
Markup
Profit as a percentage of cost. Used to set prices. If your cost is $100 and you apply a 50% markup, you sell for $150 and earn $50 profit.
Profit margin
Profit as a percentage of selling price. Used to measure profitability. That same $50 profit on a $150 sale is a 33.3% margin.
Conversion formulas:
- Markup to margin: Margin% = Markup% ÷ (100 + Markup%) × 100
- Margin to markup: Markup% = Margin% ÷ (100 − Margin%) × 100
For example, a 50% markup equals a 33.3% margin. A 25% margin requires a 33.3% markup. The free markup calculator above handles both conversions instantly in the Markup → Margin and Margin → Markup tabs.
Setting prices
How to set your markup percentage
Businesses that know their markup before quoting a client or tagging a product tend to be the ones that stay profitable rather than merely busy. Set it too low and you may cover cost of goods sold but fail to cover overhead costs, leaving you with a net loss. Set it too high and you lose sales to competitors offering similar products at lower prices.
What your markup needs to cover
A common mistake is setting markup based only on direct product cost without accounting for overhead. Your markup needs to cover all of the following before generating actual profit:
- Cost of goods sold (COGS) — materials, manufacturing, wholesale purchase price
- Overhead costs — rent, utilities, software, insurance, salaries of non-production staff
- Marketing and sales costs — advertising, commissions, packaging
- Transaction costs — payment processing fees, shipping, returns
- Desired profit margin — what you actually want to take home after all of the above
If your product costs $40 to produce and your overhead per unit is $15, your total cost is $55. A 25% markup on $40 gives you a $50 selling price — which doesn't even cover your total cost. You'd need to calculate markup on fully loaded costs, or set a higher markup percentage to account for the gap.
Cost-plus pricing
The most straightforward markup strategy is cost-plus pricing. Calculate all costs associated with a product, including the full cost of your product from production to shelf, then add a fixed markup percentage to arrive at the selling price. It is simple to implement and guarantees that every sale covers costs, but it has a significant weakness — it ignores what customers are willing to pay and what competitors are charging.
A product priced purely on cost may be overpriced in a competitive market or underpriced relative to its perceived value. Neither problem is visible until the sale price is already on the shelf.
Market-based and value-based pricing
More sophisticated pricing strategies start with the market, not with costs. In market-based pricing, you research competitive prices and set your selling price to match or beat them, then work backward to ensure your margin is acceptable at that price. This approach forces discipline on cost control. If the market won't support a price high enough to cover your costs plus desired profit, you have a cost or product problem, not a pricing one.
Value-based pricing goes further. Price is set according to the perceived value the product or service delivers to the customer, not its cost of production. Software and professional services frequently use this approach. A consultant charging $300/hour isn't calculating $300 as a multiple of their hourly cost — they're pricing based on the outcomes they deliver. This often allows for significantly higher markups than cost-plus methods would suggest.
Pricing decisions by business type
The right markup varies substantially by business model:
- Product-based businesses need to account for inventory, storage, and shrinkage. Retail markups are typically higher than wholesale to compensate for lower volume.
- Service-based businesses price based on labor time and expertise. The cost is primarily labor, so markups often appear high, as they must cover the overhead costs of running a practice and not just the time spent on a single job.
- Subscription businesses think in terms of customer lifetime value rather than per-unit margin, which can justify low initial markups if long-term retention is strong.
Industry standards
Typical markup percentages by industry
The figures below represent general benchmarks, or standard markup per sector, but the actual ones will depend on your costs, location, positioning, and competitor prices.
These are general industry guidelines. Always verify against your own cost structure and local market conditions. See sources below.
Sources
- Finale Inventory — How to Calculate a Markup Percentage: clothing 100–300%, electronics avg ~10%
- Koronapos — Initial Markup in Retail: grocery initial markup benchmarks
- Toast POS — How to Price Restaurant Food: food cost percentage 28–35% of menu price implies markup of 185–260%
- Wisebread — Retail Markup on Common Items: furniture markup discussion; industry professionals note average closer to 40–75%
- Angi — General Contractor Markup: average 15–20% total; Housecall Pro: residential 20–30% standard