Answers the Question
What's the return on investment?
Calculator for Product Markup
What Is the Product Markup?
Markups represent the return on investment for a business. The greater the markup, the more profit a firm will make on the sale of its products.
Some industries and vendors are required to base their pricing via fixed markups, but in most cases, such strategies lead to sub-optimal results. Often, some products will be able to command much higher price increases than others.
Why Is it Important?
- Product markups are an important input into profitability calculations.
- In many industries, markups are the key input into pricing formulas.
Formula(s) to Calculate Product Markup
- (CUSTOMER PRICE - VENDOR COST) / VENDOR COST
- Not considering turnover - Products with lower markups but higher sales rates will often yield higher profits than products with high markups but low sales rates.
- Not considering risk - Products that with high markups may expose vendors to risk of non-sales.
- Reputational ramifications - If customers discover that a product is offered at high markups, they may become unduly upset.
- Thinking of markups in terms of dollars rather than percentages - In many cases, opportunity costs and liquidity issues will mean that firms won't want to commit large sums of money in exchange for small percentage returns.