With a small business that sells tangible products, the closely related factors of price markup and profit margin can drive the overall results for your business. Setting a markup percentage for the total product line or by types of products allows you to quickly set pricing on new and existing products sold by your business. The markup percentage also controls the resulting profit margins.
To calculate a price using a markup percentage, add the percentage in decimal form to one and multiply it by the wholesale price of the product. So if your markup is 25 percent, you multiply 1.25 times the wholesale price. For a 200 percent markup, the multiplication factor would be 3. An item that costs your business $10 would be priced at $30 with the 200 percent markup or $12.50 if you are using a 25 percent markup.
Profit margin and markup are different ways of looking at price markup, and the two percentages tell you a different story. Markup adds to the cost of the good, and the resulting price increase is your margin. The profit margin percentage is calculated based on the selling price. In percentage terms, profit margin will be smaller than the markup percent. For example, if you mark up a $10 good by 25 percent, the price is $12.50. The $2.50 profit results in a 20 percent profit margin - -- $2.50 divided by $12.50. Likewise, a 300 percent markup results in a 75 percent profit margin.
Prices can also be calculated using a desired profit margin percentage. In this case, the wholesale price is divided by one minus the decimal form of the profit percentage. For a 20 percent profit margin on a $10 wholesale good, divide $10 by 0.8 -- one minus 0.2 -- to get a price of $12.50. This is the same price you got when applying a 25 percent markup.
You can calculate the price markup on your products by either multiplying with a markup percentage or dividing using the profit margin percentage. However, you need to set a policy in your business of which method to use and be consistent. A 50 percent profit margin is much different to your bottom line than a 50 percent markup. Prices should be calculated and tracked using some form of automated system, either a dedicated sales software program or through the use of spreadsheets that will calculate price using the method of your choice.
