Ending the year with a profit is the objective of all small businesses which is why deciding the markup price for each product and/or service is crucial. By definition, markup is what a business adds to the cost of a product to arrive at the selling price.
With this in mind, it is essential for small business owners to learn how to calculate markup to ensure their products are making the company money.
To assist small business owners in calculating markup, Small Business Trends connected with experts to help owners understand the best ways to do so.
The CEO of Glacier Wellness, Solomon King, shared a valuable insight which could serve as a starting point for business owners. “The first and most crucial step in calculating markup for your business is to assess standard market pricing and audit your expected competition. Market research should include surveying the top online retailers to look for discrepancies in pricing, which may shed light on how different retailers affect markup.”
King’s input is very helpful and gives an idea where markup is important in relation to competitors. If you don’t factor in the proper markup on your goods and services, you’ll end up with tight cash flows which in turn makes it difficult to cope with expenses.
The proper markup computation is the important piece your small business financial toolkit. Follow this simple formula which includes the markup percentage for better retail pricing:
The Margin Percentage = (Gross Profit Margin/ The Cost Per Unit) x100
Understanding this basic math is enough. The key is to know the gross profit so you can plug the right numbers in.
Among the vital computations is the cost per unit. You take into account the cost of labor, materials, and any overhead expenses like utilities when producing your goods. Don’t forget to add them all in into the given formula.
To practice some calculations for your own business, click here.
The standard markup is 50% although it doesn’t mean you can’t adjust. You’re still the best person to set the percentage you deem is viable to make profits.
In order to be safe and stay within your market’s pricing, always take note of the manufacturer suggested retail price (MSRP). Let the MSRP be your benchmark.
Account for the Variables
Markup is just one of the variables or components used in any pricing scheme. Aside from fixed costs, variable costs can alter your markup. For products you order for reselling, be mindful of the cost of each product. If you’re making the products yourself, consider not only the cost of raw materials but also all the variables you spent on to produce the final product.