This article is part of a larger series on Retail Management.
In retail, your margin and markup are two of the most important metrics for measuring your profit and understanding your pricing. Your margin refers to your business’s net revenue minus the cost of goods sold (COGS), while your markup is the difference between the selling cost and wholesale or production cost of your merchandise.
Our calculator will help you measure both your margin and markup quickly and easily, so that you can see if you are on the right track or need to make adjustments for success. Input the price that you sell your merchandise for and the cost that you paid for it, and your margin and markup will appear automatically.
Although both margin and markup calculations take into account the same metrics, cost and price, they are not interchangeable. Let’s take a deeper look at what margin and markup mean, how they are calculated, and the ways that you can use them to run a successful retail business.
Calculating Retail Margin
Retail margin refers to the selling price of an item minus all the costs associated with that item—known as COGS. This includes all labor, transportation, storage, marketing, and unit costs. In other words, margin is your revenue minus all the money you have spent on acquiring and managing your inventory.
Retail Margin Formula
For a better understanding of the math behind your margin, refer to the following formula:
Margin = (Price – Cost) / Price
Price refers to the sale price of an item, and cost refers to the COGS. For example, let’s say you bought pots for $30 each plus $10 in transportation and labor costs. You then sell the pots for $80 apiece. The margin formula would be:
Margin = ($80 – $40) / $80
Margin = 0.5
In this case, the margin for your pots is 50%. Margin is typically written as a percentage and represents the amount of profit you make on every dollar in a sale.
Price – Cost is also equal to your Profit, so the margin formula can also be expressed slightly differently:
Margin = Profit / Price
Calculating Retail Markup
Retail markup refers to the difference between the selling price and the direct or wholesale costs of a product or products and is a way of expressing the profit made compared to the direct cost. You can also think of markup as describing a ratio of the cost compared to the profit.
Retail Markup Formula
You can use a simple formula to calculate retail markup:
Markup = (Price – Cost) / Cost
Since Price – Cost is also the Profit, another way you can express retail markup is:
Markup = Profit / Cost
Returning to the same example, you bought pots for $40, including labor costs, and are selling them at $80 apiece. In this example, you have a 100% markup.
Markup = ($80 – $40) / $40
Markup = $40 / $40
Markup = 1
As with margin, your markup is typically expressed as a percentage, so in this case, it would be 100%.
How To Use Retail Margin & Markup
Understanding and tracking your business’s retail margin and markup is essential for running a profitable business. Through the use of industry benchmarks, you can stay competitive in your unique market. Additionally, you can use markup and margin insights to ensure that your business isn’t overspending and is yielding a profit.
Retail Margin Best Uses
You can use your margin to look at individual products and how much profit they are going to create for your business. However, you can also use your margin to help you understand larger trends in your business and stay on top of your finances.
- Quarterly or annual profit reports: You can look at your margin for the quarter or the year to understand your overall profit and revenue. For example, let’s say your overall margin for the quarter is 50%. Because all the COGS have been accounted for, you know that the 50 cents per dollar of remaining revenue can go toward other business expenses.
- Company efficiency: Keeping an eye on your margin will alert you to efficiency issues within your company before your margins are so low that you are no longer able to cover costs. For example, if your margin drops significantly from the year before, you will need to reevaluate your costs and revenue to determine the issue.
The easiest way to adjust your margin is to either decrease your wholesale and production costs or increase your price. Beware though: You don’t want to sacrifice quality or drive people away with your prices.
Retail Markup Best Uses
Deciding your markup and keeping track of it will help ensure your business remains financially strong and competitive. As the name may have already been made clear, markup is typically used to help guide your pricing so that your business can be profitable and competitive.
Monitor your markup to:
- Determine selling prices: Using industry benchmarks and your own sales goals, you can use markup to set prices that are competitive and in line with your business goals. For example, say you want to earn a 20% profit on everything you sell. You can use the markup formula or calculator to set your prices to reflect that goal.
- Meet profit goals: Using a strategic markup, you can determine how much you need to sell your products to offset any production or wholesale costs while also meeting profit goals.
There is a wide array of standard or ideal retail margins and markups across industries. Using these benchmarks as a guide, you can compare your business’s margins and markups with others in your field to determine how you stack up against the competition and evaluate whether you need to make changes.
Industry standards are not static. They change constantly with the market. Be sure you are checking your industry’s benchmarks regularly to ensure that you are maximizing profit and staying competitive.
Margin and markup are two of the best metrics to track when it comes to monitoring your revenue and ensuring your business is staying profitable. Using the calculator or formulas above, you can track gross margin to see how efficiently your business is performing and measure your profit on every dollar. You can also keep track of your price markup to ensure you are staying competitive and maximizing your profits. Utilize these metrics to ensure that your business is healthy and fruitful.