Markup is essentially the amount added to your production cost price to arrive at a recommended selling price. It is a commonly used technique to use in determining how much to charge for your products as it ensures that you fully factor in the expenses involved in producing your products.
In order to use a markup pricing strategy, it is essential to know how much it costs you to produce your product - this should include both materials and your costs of labor at a minimum.
Tip: Craftybase is a system designed specifically for handmade sellers that allows you to calculate your exact costs of production by tracking your material inventory.
The basic markup formulae looks something like this:
It may look a little complex on first glance, but it's really quite straightforward:
The first Cost variable is your base manufacture cost (otherwise known as your "Cost Price"), and the equation in brackets is essentially the marked up amount you are adding on top of this cost to arrive at your final sale price.
Let's step through in detail with some examples.
Example: Jane makes a scarf and she calculates that it costs her a total of $29 to make the product.
Using the formula above, let's calculate the cost price markup using 0%:
29 + (29 x 0) = 29
Now, let's apply a 150% markup (1.5 multiplier):
29 + (29 x 1.5) = 72.50
Calculating markup on your existing priced products
You can reverse the formula to also find out what markup you are using on your current pricing so you can see how it compares.
In this calculation, you'll want to put your current price for Price and your total manufacture cost for Cost.
Margin vs Profit
It is important to make a clear distinction between margin and profit here: a markup of 150% does not equate to a profit margin of 150%.
Your profit margin is calculated by dividing your costs by your total revenue.
In the example with Jane above, the profit margin would be 43.50 / 72.70 = 59%.