Markup definition.

A markup is the difference between the final selling price of a commodity and its cost price. Markup pricing is where a seller imposes a markup onto the cost of a product or security in order to ensure that the final selling price covers the costs borne by the seller.

Markup is advantageous as it enables sellers to build a profit margin into their pricing, preventing losses that could stymie business cash flow and growth.

Markups are commonly encountered in the retail sector and in the realm of financial trading, albeit with slightly different definitions. We explore the meaning of markup in a business and trading context.

Markup in retail

A retailer’s markup is the amount or percentage that a seller will add to a product in order to ensure that there is a profit margin. This markup must be low enough to be competitive for the customer, but also substantial enough to ensure that the sale is profitable.

Some perishable, rotating or seasonal stocks may need sufficient margins that a product can be [marked down]((/gb/en/glossary/markdown) towards the end of its usable life to prevent wasted inventory while also ensuring a modest profit for the seller.

Example of a retail markup

The owner of a corner shop buys 6 bottles of milk for £5. They then sell these bottles for £1.20 each, resulting in a £7.20 revenue for all 6. Therefore, the retailer’s markup is 20p or 20% on each bottle. If the shop only sells 5 of these bottles by the day before their expiry date, the agent may sell the last bottle at a reduced price of £1.10 and still retain a 10% markup.

Markup in trading

The term markup also occurs in trading. It applies where dealers sell securities from their own accounts directly to retail investors. Here, the spread between the price for which the dealer bought the security and the price at which they sell is the markup.

Depending on the size of this spread, the dealer may be able to markdown any securities that do not sell as well or as quickly as anticipated. Brokers will also markdown securities, compensating themselves by slightly adjusting their commission to make up for any losses.

Unlike in retail transactions, the markup is determined not by the inherent value of the item sold but by the bid-ask spread. That is to say, the price at which a bidder is willing to pay and the price that a seller is willing to sell for.

Example of a trading markup

A dealer purchases £10,000 in shares on the open market with a view to selling them on for £15,000. As the company gets ready to launch an exciting new product, bidding prices start to rise. The dealer finds a bidder who will buy the shares for £13,500 leaving the dealer with a markup of 35%.

Markup formula explained

As we can see, markup is inextricably linked to profitability for retailers, dealers and brokers. But how do they use markup to quantify the profitability of their operations? The better sellers of all kinds understand their markup percentage, the better equipped they are to understand their margins and the room for adjustment available should they wish to markdown their prices.

A markup percentage will usually be calculated by deducting the cost price from the sale price of a unit of stock, commodity or security (which includes the gross profit). This is then divided by the cost price.

So if an item is purchased for £10 and sold at £14 the markup percentage is 40%. 10 is subtracted from 14 and the resulting number is divided by 10.

Markup FAQs

What is the difference between a markup and markdown?

A markup is the difference between the cost price and the selling price of an item. A markdown, on the other hand, involves reducing the selling price, bringing it closer to the cost price to motivate sales.

What are the advantages of markup pricing strategy?

• easy to calculate and implement

• helps to ensure profitability

• recovers cost of goods sold (COGS)

• provides a baseline for gross profit and markdowns

What are the disadvantages of markup pricing strategy?

• can erode margins if cost prices increase

• may result in lower profits if stock has to be marked down

• does not necessarily account for consumer demand