In business terms, markup is defined as the difference between the actual or marginal cost of the good or service and its price when it is sold.

There are two methods in determining the markup of a product service: the markup on cost and markup on selling price (also called profit margin).

Markup on Cost

For the markup on cost method the company adds either a fixed amount or a minimum percentage based on the original product. For example, if they got an item for $10 from their supplier and they want a 20% return of their investment, then they add $2 (20% of $10) to the original price. The item will now be sold by that company at $12.

They could also just decide to add a flat $5 minimum fee to resell all items so that the item will be sold at $15 instead. The resell price will all be determined to the pricing method the company uses.

Markup on selling price

The increase in price for this the same as markup on cost but it is reported in terms of profit margin. To compute for that the following formula is used:

Margin = (1-(1/(Markup+1)) = (1-(1/(0.20+1) = 1.2%

In our example that would mean that the profit margin will be reported as just 1.2%, which would seem like the company is making much less even with the same markup.

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