When you go to the store and see the prices on the products, those products have already been marked up to generate profit for the store. Profit is the difference between the cost of an item and its selling price. It is also referred as the price markup, and it is expressed in either dollars or a percentage. If your intention is to get into any field that requires the sale of products or services, then you will need to understand price markup.
A Quick Intro Into Price Markup
There are several ways to calculate price markup and we will start with the most basic. Lets say we have a product that costs $100 and we want to mark it up to sell for $125. In this instance, the $100 is the cost of the item, the $125 is the selling price and the $25 is the price markup. If we put it into a formula, it would be:
Price Markup = Selling Price – Cost
Profit Margin Percentage
When we calculate profit margin percentage, we are using the price markup as our guide. In the simple example we used earlier, the profit margin percentage would be 25 percent. As a formula, this would be:
Profit Margin Percentage = ((Selling Price – Cost)/Cost) x 100
Selling Price As A Function Of Profit
To get the price markup, businesses normally calculate how much profit they want to make on a product based on the cost. For example, if a product cost $50 and the business wanted to make a 15 percent profit, then the selling price would be $57.50.
To get that number, you first have to turn the profit margin into a decimal number and add one to it. In this example, the profit is 15 percent. That means we would turn 15 percent into .15 and add 1 to it to get 1.15. We will call this profit plus one. The rest of the formula would be:
Selling Price = Cost x Profit Plus One
In this example, our cost was $50 and the profit plus one would be 1.15. When you use them in the formula, you get $57.50.
The price markup is how much the business gets for its product or service on top of the cost. Businesses are constantly trying to maximize their price markup without sacrificing sales, and it is a balancing act that goes on forever. A great deal of research goes into determining the price markup for products, and much of that research is geared to determine what consumers consider to be a fair purchase price.