Why use this calculator
Cost-plus pricing is how most trades, wholesalers and retailers actually set prices, because a markup can be applied to any cost without knowing anything else about the business. The problem is that suppliers, buying groups and point of sale systems talk in markup while accountants, lenders and industry benchmarks talk in margin, and the two numbers are never equal.
A 60% markup sounds like it should leave 60 cents in every dollar, but it is a 37.50% margin, and a business that budgets on the markup figure will be short on every line. This calculator converts between the two automatically, then goes one step further and subtracts operating overhead, so you can see whether the markup you have always used actually leaves a net profit at today's rent and wage levels.
How to use it
- Enter the unit cost as the landed cost from your supplier invoice, which means the purchase price plus inbound freight, duty and any handling charge, rather than the list price before your trade discount.
- Enter the markup percentage you intend to apply, taking it from your supplier's recommended uplift, your buying group's pricing matrix or the multiplier your trade traditionally uses, and note that retail keystone pricing is a 100% markup.
- Enter operating overhead as the share of your selling price consumed by rent, wages, insurance, marketing and administration, which you can calculate from last year's profit and loss by dividing total operating expenses by total sales and multiplying by one hundred.
- If you only want the pricing arithmetic and not the net profit test, set the overhead field to zero and read the gross figures alone.
What each result means
- Selling price
- The price this markup produces, before any tax, discount or freight charged separately to the customer.
- Gross profit per unit
- Dollars left after the cost of the item itself. This is the pool that has to cover every overhead in the business.
- Gross profit margin
- The same profit measured against the selling price. This is the figure your accounts, your lender and industry benchmarks will use.
- Operating overhead per unit
- The share of rent, wages and administration this sale has to carry, based on the overhead percentage you entered.
- Net profit per unit
- Gross profit less allocated overhead. If it is negative, the markup is too thin to run the business on.
- Net profit margin
- Net profit as a percentage of the selling price, which is the number comparable to published sector net margins.
The formula
Gross profit per unit = Cost × (Markup ÷ 100)
Selling price = Cost + Gross profit, which is the same as Cost × (1 + Markup ÷ 100)
Gross margin
% = (Gross profit ÷ Selling price) × 100, which is also Markup ÷ (1 + Markup) when the markup is written as a decimal
Operating overhead per unit = Selling price × (Overhead ÷ 100)
Net profit per unit = Gross profit − Operating overhead
Cost is the landed unit cost, Markup is the uplift applied to that cost, and Overhead is the share of the selling price taken by period costs.
To reverse the conversion
Markup = Margin ÷ (1 − Margin)
How this number is used in practice
Traditional markups vary widely by trade and are usually quoted as a multiplier rather than a percentage. Grocery and convenience retail typically runs 10% to 40% markup on most lines, with fresh categories higher to cover wastage. General hardware and building supplies commonly sit at 30% to 60%.
Fashion and homewares retail has long used keystone pricing, meaning a 100% markup or a doubling of cost, which is a 50% margin. Restaurants mark food up by roughly 200% to 300%, giving a 67% to 75% gross margin, and beverages higher again. Trade contractors typically apply 10% to 25% to materials and price labour separately.
Consumer electronics is the outlier in the other direction at 10% to 30%, which is why volume and attachment sales matter so much in that sector.
The practical test is not the markup but what survives after overhead. A retailer paying 35% of sales in rent, wages and administration needs a gross margin above 35% just to break even, which means a markup above 54%. That is why a 40% markup, which looks generous, produces a 28.57% margin and a loss for that business on every sale.
Owners who price by habit are the most exposed, since the markup they inherited was set when rent and wages were a smaller share of sales. Reviewing markup against current overhead, category by category, usually shows that a handful of high-volume lines are being sold below the true cost of serving them while the rest of the range subsidises them.
Worked examples
$50 landed cost at a 60% markup, with overhead running at 20% of sales
Sells for $80.00 at a 37.50% gross margin, leaving $14.00 net per unit after $16.00 of overhead.
Restaurant dish costing $8 in food at a 200% markup, with overhead at 35% of sales
Menu price $24.00 at a 66.67% gross margin, leaving $7.60 net after $8.40 of overhead.
Trade item costing $120 at a thin 25% markup, with overhead at 18% of sales
Sells for $150.00 at a 20.00% gross margin, leaving only $3.00 net profit per unit.
When people use it
- Setting retail shelf prices from a supplier cost list
- Converting a supplier's recommended markup into the margin your accountant reports
- Pricing a menu item from its food cost and checking it against a target gross margin
- Quoting materials on a trade job with a standard uplift
- Testing whether an inherited markup still covers today's rent and wage levels
- Building a price list where different categories carry different markups
Tips
- Markup and margin are different numbers for the same profit. Convert with Margin = Markup ÷ (1 + Markup), so a 50% markup is a 33.33% margin.
- Keystone pricing means doubling the cost. That is a 100% markup and exactly a 50% gross margin.
- Work from landed cost, not invoice price. Freight, duty and handling can add ten per cent or more, and a markup applied to the wrong base is wrong everywhere.
- Check your markup against overhead as a share of sales. If overhead is 35% of sales, a markup below 54% loses money on every unit.
- Vary markup by category rather than applying one number across the range. Fast-moving lines can carry less; slow or service-heavy lines need more.
- Allow for markdowns before you set the markup. If you expect to discount a fifth of the range, the full-price markup has to carry that loss.
- Add merchant and marketplace fees to cost before marking up, since they take a percentage of the final price and quietly eat the margin you thought you set.
What it assumes, and where it stops being accurate
- Overhead is treated as a flat percentage of the selling price, which is a simplification. Real overhead is largely fixed and the true share per unit falls as volume rises.
- The unit sells at full price. Discounts, markdowns and promotional pricing all reduce the realised margin below the figure shown here.
- Tax is excluded. Enter costs and prices on a tax-exclusive basis, then add GST or VAT separately.
- Freight charged to the customer, delivery costs and returns are not modelled and can move the real result materially.
- It is not a tax or statutory profit calculation: the net profit shown is a pricing estimate before income tax, interest and depreciation unless you build those into overhead.
- Stock holding costs, shrinkage and obsolescence are ignored, so slow-moving lines are less profitable than this calculation suggests.
Terms used on this page
- Markup
- Profit expressed as a percentage of cost, used to build a selling price up from a supplier invoice.
- Margin
- Profit expressed as a percentage of the selling price, the basis for accounts and benchmarks.
- Keystone pricing
- Doubling the cost to set the retail price, being a 100% markup and a 50% margin.
- Landed cost
- The full cost of getting a unit into your warehouse, including freight, duty and handling.
- Cost-plus pricing
- Setting a price by applying a fixed percentage uplift to cost rather than to market value.
Questions people ask
- What is the difference between markup and margin?
- Markup is profit as a percentage of cost; margin is the same profit as a percentage of the selling price. A $50 item sold for $80 carries a 60% markup and a 37.50% margin. Markup is always the larger number, and mixing the two up is the most expensive arithmetic mistake in small business pricing.
- How do I convert a markup into a margin?
- Divide the markup by one plus the markup, both expressed as decimals. A 0.50 markup becomes 0.50 ÷ 1.50, which is 0.3333 or a 33.33% margin. To go the other way, divide the margin by one minus the margin, so a 40% margin needs a 0.40 ÷ 0.60 markup, which is 66.67%.
- What markup should I use?
- Start from your overhead. If rent, wages and administration take 30% of sales, you need a gross margin above 30% to make anything, which means a markup above 43%. Then check against your trade: grocery runs 10% to 40%, hardware 30% to 60%, fashion around 100%, and restaurant food 200% to 300%.
- What is keystone pricing?
- Keystone means doubling the cost to set the retail price, which is a 100% markup and a 50% gross margin. It was the default across general retail for decades because it is easy to apply and leaves room for markdowns. Competitive pressure has pushed many categories below it, so treat it as a reference point rather than a rule.
- Should I mark up on cost or on the price I want?
- Use markup on cost when you are building a price list from supplier invoices, which is the usual case. Work backwards from a target margin instead when a benchmark or a lender covenant is stated as a margin. Divide the cost by one minus the target margin, so a $60 cost at a 40% margin needs a $100 price.
- Why is my actual margin lower than the markup I set?
- Three reasons, usually together. Margin is always lower than markup for the same profit, so part of the gap is arithmetic. Discounts and markdowns reduce the realised price. And costs that were left out of the base, such as inbound freight, merchant fees and shrinkage, come out of the margin after the markup was applied.
Use this with
Markup Calculator answers one part of the question. These pick up where it stops: Profit Margin Calculator, Break-Even Calculator, Discount Calculator and Pricing Strategy Calculator.
Where these figures come from
This calculation is jurisdiction-neutral arithmetic. No country-specific rules are applied.
- business.gov.au: Australian Government business portal. Official guidance on pricing, cash flow and financial management for small business
- U.S. Small Business Administration. Pricing, break-even and financial planning guidance for US businesses
- Internal Revenue Service. US federal treatment of business income, cost of goods sold and deductions
Markup Calculator produces an estimate for general information. It is not financial, tax, medical, legal or engineering advice. read the full disclaimer. Spotted a wrong number? Report it and it gets fixed. The form picks up this calculator and the inputs you used.