To make a profit, businesses set product prices higher than the cost to produce the item. The difference between the product cost and the product sales price is referred to as "markup." Businesses often consider both the product cost and competitor prices when setting markup percentage.
Markup percentage is equal to gross profit margin divided by the unit cost. Gross profit is equal to unit sales minus the cost of the product. For example, consider a company that purchases a product for $10 and resells the product to customers for $15. The gross profit is $5, the unit cost is $10, and the markup percentage on the product is 50 percent. The higher the markup percentage, the more sales revenue a business earns relative to the product cost.
