Knowing what you will earn from your product or service is a great way to determine how much you will earn from your business in the long term. The markup is the amount of money you will get for selling a product or service with your personal costs factored in the amount. The markup that you generate for your product or service should be competitive and sensible for your product or service to earn a steady amount of income.
Below are the steps to calculate a markup.
- Know the cost of the product/service. If you have a pen and plan to sell it, how much was the pen you bought? The individual cost of the item is an important factor when calculating for a price markup. The idea of setting a markup is to get back what you spent for the item and more to generate an income.
- Know the markup percentage. The markup percentage is the amount in percentage that you will add to the original product or service cost. You have the choice of making up your own product percentage. However, if you want to be competitive in the industry of your choosing, you should research the common product or service markup percentage that other business owners applied to their product or service. A lower markup percentage means a lower price for the product or service. A lower price for your product or service might attract more customers. Keep in mind that the markup percentage must be reasonable for you and for others that will avail of your business.
- Turn the markup percentage into a decimal number. Conversion of your markup percentage to a decimal number will allow you to calculate the markup cost. If you chose a markup percentage of, say, 50%, move the percentage sign two places to the right. You now have .50.
- Subtract the cost of the product/service with the decimal number from your markup percentage. In the example used in step 1, you will need to subtract the cost of the pen with the decimal number you came up with when you converted the markup percentage into a decimal number. If the pen cost you $1.00, subtract the .50 from 1.00. You will get .50.
- Calculate for the price. You have to divide the cost of the product/service with the .50 that you calculated from subtracting the product/service cost with the decimal number. In this case, you should divide $1.00 with .50. The resulting number is 2. Therefore, the price of the product you will sell is $2.00.
- Get the price markup. Subtract the product/service cost with the product price you calculated. In this case, subtract $1.00 from $2.00 and you will get the price markup. The result is $1.00, and that is your price markup.
The markup is the amount you earn back from selling your product or providing your service. With the steps above, you can easily determine how much money you will earn back apart from the product/service cost. Always remember that a high markup percentage means higher income, but if your markup price is too high because of an unreasonably high markup percentage, you will be hard-pressed to generate income from your business.