Markup strategies for small businesses: balancing competitiveness and profit

Published January 6 2025

Table of contents

• What is markup?
• How markup strategies work
• Markup strategies that balance competitiveness and profit
• How to adapt markup to your market
• Tips to protect profit margins as costs change
• How Xero helps you track and refine markup
• FAQs on markup strategies

Key takeaways

• Your markup is the extra bit on top of the cost of your product or service to determine. It’s the difference between the buy and sell price.
• You need to balance competitive pricing and profit in your markup strategy. There are lots of options, like using a fixed percentage or applying different markups to different product categories.
• Don’t just ‘set it and forget it’. Keep an eye on your costs, and update your markup strategy as markets and customers change. Use modern accounting software like Xero to get a better view of your margins.

What is markup?

The markup is the extra bit a business adds to the cost of its product or service to determine its sale prices to the consumer. It’s the difference between your cost price (what it costs you to provide the product or service) and sell price, and is usually calculated as a percentage of the cost price.

So, if your shoe shop sells shoes at a 30% markup on the cost price – let’s imagine a pair costs your business £150 – the shoes retail for an extra 30%, or £195.

A markup enables you to cover costs and make a profit. Though they’re similar, markup and profit aren’t the same thing – just because you markup an item by 30% doesn’t mean the full 30% is your profit. The profit margin calculation is slightly different to the markup calculation, too.

A smart markup strategy helps you find the right balance between sustaining a healthy profit margin, providing fair prices to customers, and keeping your business running.

How markup strategies work

Markup is usually added as a percentage on top of your cost price. To use a markup strategy for your goods or services, you need an accurate calculation of how much a product or service costs to deliver. This is sometimes referred to as cost of goods sold (COGS) – here’s how to calculate COGS using a simple formula.

From here, the proportion of your COGS you decide to mark up a product or service by is up to you. Most businesses have a sense of their desired profit margin, and you can use this to guide how much you mark up a price.

• The higher the markup, the higher the potential profit per item – though you run the risk of putting customers off, reducing your competitiveness.
• The lower the markup, the slimmer your margins for making a profit, but the more competitive your prices will be.

Markup strategies that balance competitiveness and profit

Your markup strategy can be as simple or as multilayered as you want. You can set a fixed markup for all products, or apply different percentages to different items or categories. Here are some example markup strategies you can use to guide your thinking.

• Cost-plus markup: This is the simplest markup strategy to apply. You first use the COGS to calculate how much a product or service costs to provide, then add a fixed percentage to this cost to create your selling price. You apply this percentage across your product lines to create your prices.
• Keystone markup: A bolder markup strategy than cost-plus pricing, keystone markup is where you add 50% to the wholesale price or cost – making the retail price of your goods or services double what you bought it for. It’s a popular strategy with retailers because it usually ensures a healthy profit.
• Tiered markup: With a tiered markup strategy, you apply different percentages to different product types, categories, and even customers. It’s popular with software as a service (SaaS) companies that offer a range of pricing plans to entice customers. You can also use it to reward customers with a lower markup for high-volume purchases, and a higher markup on one-off, more costly items or services.
• Volume-based markup: The clue’s in the name; a volume-based markup strategy applies a different percentage based on how many items the customer buys. Typically, the markup percentage falls the more a customer buys. This strategy rewards bulk purchases and works for businesses that sell in high volumes.

Your accountant or bookkeeper should be able to help you apply a specific markup strategy. It’s worth getting their guidance, and asking them about industry standards for markup strategies, so you can find the right one for your business.

How to adapt markup to your market

Here are some steps you can take to make your markup strategy work for your market:

• Research industry standards and competitors: By looking into industry and competitor approaches you benchmark your prices.
• Calculate your costs: What goes into providing a product or services? Tally up your direct and indirect costs, including things like shipping, marketing, and business overheads, so you can allow for these in your price.
• Set a profit margin: This is different from your markup. If you want a 20% profit margin, you need to mark up the price by 25%. This is because markup is calculated as a percentage of costs, whereas profit is worked out as a percentage of the total price.
• Get customer feedback: Talk to your customers about what they’re willing to pay and how they feel about costs. Look at your sales data to see how customers are behaving, which products they’re regularly buying, and whether you can bundle items together.
• Review your markup strategy regularly: The price of inventory, labour, and premises is often changing – these things can quickly eat into your profit margin if you’re not watching them carefully. Increasing your prices gradually over time could be more acceptable to customers than a sudden hike.

Tips to protect profit margins as costs change

Here are some ways to keep your profit margins healthy.

Track your spending closely

Use the reporting and analytics features in your accounting software to see exactly how much you spend on your product or service, so you can make sure you’re getting the right amount of profit.

Negotiate with your suppliers

If you’re a regular customer and can guarantee regular income for your suppliers, they might work with you on a better deal for raw materials and inventory.

Increase prices gradually

Revisit your pricing often to make sure you’re still making a profit. If costs increase and you haven’t factored this into your pricing, your markup – and profit – will be lower.

Shop around for better deals

Keep an eye on the things you buy regularly, like packaging, mobile or internet contracts, or third-party delivery. See if you can find these cheaper through other suppliers.

How Xero helps you track and refine markup

Xero lets you see your finances more clearly, so you can set prices that protect your profits while keeping you competitive in the marketplace. Xero generates expense reports, profit and loss, and cash flow statements for you – all using your latest numbers so you know our info is reliable. That makes it much easier to charge your worth and keep up with changing costs.

Try Xero for free to get started today.

FAQs on markup strategies

Here are some common questions and answers on markup strategies for your small business.

What are common markup methods?

‘Cost plus’ pricing is the simplest method – you just add a fixed percentage to all your products and services. There’s also keystone markup, which doubles your cost price, and a tiered markup strategy, where you apply different percentages to different items or services based on how much or how frequently a customer purchases them.

What is a 40% markup on £100?

It comes to £140. You add 40% to £100:

0.4 x 100 = 40

£100 + £40 = £140.

How often should I review my markups?

Aim to check them every quarter, but also watch for market changes that might force you to adjust your markups if costs rise. You may need to update your markups more often in economically turbulent times.

How do I apply markups to services or projects?

You can use a similar markup process for pricing your services and projects. Use the COGS calculation, and account for the direct costs that go into providing the service or project, like labour (as a direct cost). Then decide on your percentage markup.