Markup is defined as the selling price for goods and services as opposed to how much it costs to make them. Small businesses need to keep in mind that the markup is different from some other terms like margin and profit.
If the whole thing sounds daunting while you slog through the day to day of your small business operations, it doesn’t need to be. Small Business Trends contacted some experts who helped us clearly define how to calculate markup for your business.
Solomon King is the CEO of Glacier Wellness. He provided a starting point via email about understanding the playing field.
“The first and most crucial step in calculating markup for your business is to assess standard market pricing and audit your expected competition. Market research should include surveying the top online retailers to look for discrepancies in pricing, which may shed light on how different retailers affect markup.”
This is a helpful foundation. It’ll give you an idea of where your markup should be in relation to the people you are competing with. Keep in mind that getting this particular part of your small business right is essential. If you don’t charge enough for your goods and services, you can find your small business struggling when you add up expenses. On the other side of that coin, if you price everything too high you might attract the top end of people in your retail market but that number might not be sustainable.
Calculating the markup properly is an important part of your small business financial toolkit. Here’s a simple formula that includes the markup percentage that can help you arrive at your retail selling price.
The Margin Percentage= (Gross Profit Margin/ The Cost Per Unit) x100
There’s obviously a bit of math involved and understanding things like gross profit margin will help you to plug the right numbers in. Here’s a calculator that should help.
One of the other calculations that you need to make use of is your cost per unit. This will include the money that you need to spend on things like labor and materials and any overhead like the cost to keep the lights on while you’re producing your goods. These all need to be added into the formula.
The usual markup is around 50% although you can obviously set the numbers based on what you think your market will withstand.
There are some other things that you need to consider as a small business owner, especially if you’re reselling products made by someone else in retail. When you’re calculating your markup it’s always important to consider the manufacturer suggested retail price (MSRP). It’s a guideline that you should consider as a benchmark.
It’s important to remember that markup is only one of the variables that goes into a pricing structure. There’s a few other things that can tweak your markup including variable costs. Keep in mind that if you order the products you resell, it’s easier to calculate how much each one of these costs you.
On the other side of that coin if you make the products yourself you need to look at a variety of factors including how you source raw materials.
Source: Small Business Trends