What is markup and how do you calculate it?

Published Tuesday 7 July 2026

Table of contents

• What is markup?
• How to calculate markup
• Markup vs margin
• How to set the right markup for your business
• Benefits of markup pricing
• Common markup mistakes to avoid
• When to adjust your markup
• Track your markup and profits with Xero
• FAQs on markup

Key takeaways

• Markup is the percentage you add to a product's cost to set its selling price, and it directly determines your gross profit on each sale.
• To calculate markup percentage, subtract the cost from the selling price, divide by the cost, and multiply by 100.
• Markup and margin are related but different: markup is based on cost, while profit margin is based on sell price.
• Review your markup regularly to keep pace with changing costs, market conditions, and business goals.

What is markup?

Understanding markup is one of the most practical pricing skills you can build as a business owner. It's the foundation for setting prices that cover your costs and generate profit.

Markup is the percentage added to the cost of a product or service to determine its selling price. If you buy an item for $50 and sell it for $75, your markup is $25, or 50% of the cost.

Businesses across every industry use markup to price their products. Retailers, restaurants, consultants, and service providers all rely on markup to make sure each sale contributes to their bottom line. The right markup percentage varies by industry, but the concept stays the same: it's the difference between what you pay and what your customer pays.

How to calculate markup

Calculating markup is straightforward once you know the formula. You only need 2 numbers: your cost and your selling price.

The markup percentage formula is:

Markup % = ((Selling Price - Cost) / Cost) x 100

Here's how to use it step by step:

1. Start with your cost. This is what you paid for the product or what it cost to deliver your service.
2. Subtract the cost from your selling price. This gives you the dollar amount of markup.
3. Divide that dollar amount by the cost.
4. Multiply by 100 to get the markup percentage.

For example, if you buy a product for $40 and sell it for $60:

• Selling price minus cost: $60 - $40 = $20
• Divide by cost: $20 / $40 = 0.5
• Multiply by 100: 0.5 x 100 = 50%

Your markup is 50%. You can also work backward. If you know your cost is $40 and you want a 50% markup, multiply the cost by 1.5 to get your selling price of $60.

Markup vs margin

Markup and margin are closely related, but they measure different things. Confusing the 2 can lead to pricing errors that eat into your profits.

Markup is based on cost: it tells you how much you've added on top of what you paid. Margin is based on selling price: it tells you what portion of your revenue is profit. Both use the same dollar amount of profit in their calculation, but the denominator changes.

Consider a product that costs $40 and sells for $60. The profit is $20 either way. Your markup is 50% ($20 / $40 x 100). Your gross profit margin is 33.3% ($20 / $60 x 100).

Here's a quick reference showing how common markup percentages translate to margin:

• 25% markup = 20% margin
• 50% markup = 33.3% margin
• 100% markup = 50% margin
• 200% markup = 66.7% margin

Markup is always the higher number because it's calculated from the smaller base (cost). When you're setting prices, use markup. When you're analyzing your revenue and profitability, margin is typically more useful.

How to set the right markup for your business

Choosing a markup percentage isn't guesswork. It takes a clear picture of your costs, your market, and your profit goals.

Know your true costs

Before setting a markup, account for all the costs involved in delivering your product or service. Direct costs include materials, manufacturing, and labor. You'll also want to consider indirect costs like rent, utilities, insurance, and shipping.

If you only mark up your direct costs, you might not cover your overhead. That's a common path to losses even when sales look strong.

Research your market

Look at what competitors charge for similar products or services. Your markup doesn't need to match theirs exactly, but pricing too far above or below the market can hurt sales or signal low quality.

Industry benchmarks give you a helpful starting point. Grocery stores often work with markups of 15 to 30%. Clothing retailers commonly use 50 to 100%. Professional services and specialty products can go higher, sometimes 100 to 300% or more.

Set your profit target

Work backward from the profit you need. If your operating expenses are $5,000 per month and you want $2,000 in profit, your total markup needs to cover at least $7,000 above your cost of goods. Divide that by your expected sales volume, and you'll see the per-unit markup you need. Tracking this closely helps you increase profits over time.

Benefits of markup pricing

Markup pricing offers several advantages, especially for small businesses that need a reliable way to set and manage prices.

Here's what makes it effective:

• It's simple to calculate and apply across your product or service lineup
• It helps ensure every sale covers your cost of goods, so you don't sell at a loss
• It makes pricing consistent, which reduces guesswork when you add new products
• It's easy to adjust when your costs change, so your pricing stays current
• It gives you a clear view of per-item profitability, which helps you spot your best and worst performers

These benefits make markup a practical starting point for any pricing strategy. You can layer in more advanced tactics later, but markup gives you a solid, repeatable foundation.

Common markup mistakes to avoid

Even experienced business owners make pricing errors. Recognizing common markup mistakes can save you from leaving money on the table or scaring off customers.

Watch out for these pitfalls:

• Forgetting to include overhead costs like rent, insurance, and utilities in your cost calculations
• Confusing markup with margin, which leads to lower profits than expected
• Applying the same markup to every product without considering demand, competition, or perceived value
• Setting your markup once and never revisiting it, even as costs and market conditions change
• Undercutting competitors by too much, which can signal low quality and hurt your brand

You can measure profitability on individual products to catch these issues early. If a product's markup looks healthy but its margin is thin, overhead costs might be the missing piece.

When to adjust your markup

Your markup isn't something to set once and forget. Business conditions change, and your pricing should change with them.

Consider adjusting your markup when:

• Your supplier costs increase or decrease significantly
• A new competitor enters your market or an existing one changes their pricing
• Customer demand shifts due to seasonality, trends, or economic conditions
• You add value to your product through better packaging, faster delivery, or improved quality
• Your overhead costs change, for example, moving to a bigger space or hiring more staff

Review your markup at least once per quarter. Look at each product or service category individually, since a blanket adjustment might overcorrect in some areas while leaving gaps in others. Tracking your costs and margins in real time gives you the data you need to adjust with confidence.

Track your markup and profits with Xero

Setting the right markup is only half the job. You also need to track whether your pricing is actually delivering the profits you expect. Accounting software gives you a clear, real-time view of your costs, revenue, and margins so you can spot issues before they cut into your bottom line. Xero makes it easy to monitor your financial performance, generate reports, and stay on top of your pricing strategy. Get one month free.

FAQs on markup

Here are some frequently asked questions about markup to help you apply it in your business.

What is a good markup percentage?

A good markup percentage depends on your industry and business model. Retailers often aim for 50 to 100%, while grocery and food businesses typically use 15 to 30%.

What is the difference between markup and margin?

Markup is calculated as a percentage of cost, while margin is calculated as a percentage of selling price. A 50% markup on a $40 item results in a $60 selling price, but the margin on that sale is 33.3%.

How do you calculate markup from cost and selling price?

Subtract the cost from the selling price, then divide by the cost and multiply by 100. If a product costs $25 and sells for $40, the markup is ($40 - $25) / $25 x 100 = 60%.

Should you include overhead costs in your markup?

Yes. If your markup only covers direct costs like materials and labor, you might not earn enough to pay for rent, utilities, insurance, and other overhead. Factor these in to set a markup that keeps your business profitable.

How often should you adjust your markup?

Review your markup at least once per quarter. Adjust it sooner if you see significant changes in supplier costs, customer demand, or competitive pricing.