Markup

What it means

Markup is the difference between the selling price and the purchase price of goods, usually expressed as a percentage of the purchase price. If a company buys goods for 100 euros and sells them for 130, the markup is 30 euros, or 30 per cent. It has to cover selling costs and profit.

Markup and margin describe the same amount but are calculated on a different base. Markup relates to the purchase price, margin to the selling price. In the example above the markup is 30 per cent but the margin only about 23 per cent. Confusing the two is a common cause of wrong prices.

In accounting, markup matters mainly in retail, where a company may carry stock at selling prices. The difference between the selling price and the acquisition cost is then kept on a separate analytical account and released as goods are sold.

How it works in practice

In pricing we start from a cost calculation: purchase price, transport, duty, storage and a share of overheads. We then set the markup so that it covers all these costs and delivers the target profit, and compare it with what the market will bear.

Where stock is kept at selling prices, at the end of the period we work out how much of the markup relates to goods sold and how much to closing stock, using an average markup for each product group. An inaccurate calculation distorts both the value of inventory and the cost of goods sold.

Different product groups carry different markups, and together they make up the company’s overall profitability. In client reports we therefore track markup and margin by product group and sales channel to show which items make money and which merely turn cash over.

What to watch out for

Discounts erode markup faster than sellers think. With a 30 per cent markup, a 20 per cent discount on the selling price cuts the profit on the sale to less than a quarter of what it was. Before a promotion we therefore work out how many extra units must be sold for the discount to pay off.

For trade in second-hand goods, works of art or travel services, VAT may be charged only on the difference between the selling and purchase price under the margin scheme. The scheme has strict conditions and the invoice must carry a mandatory note that it has been applied.