Calculating Mark-up on Goods for Sale

Beginning with our landed cost, we “mark up” an item to a target selling price that will be attractive to the consumer and yield an acceptable gross profit margin. It is important to remember that we always refer to gross profit margin as a percentage of the selling price. The following chart helps to understand the numbers:

Calculating the Selling Price:

Selling Price

Cost Price

Gross Profit

Gross Profit %

Mark Up Factor

22.50

16.40

6.10

27.11

1.37

24.60

16.40

8.20

33.33

1.50

25.63

16.40

9.23

36.01

1.56

27.38

16.40

10.98

40.10

1.67

29.95

16.40

13.55

45.24

1.83

32.80

16.40

16.40

50.00

2.00

If our target yield was a 36% gross margin, we would mark up the item by multiplying the landed cost by a factor of 1.56, resulting in a selling price of $25.63.

There is a whole marketing psychology around pricing. Depending on the market, a selling price of $25.63 may look a little odd to the consumer. The retailer might adjust the selling price to a more conventional looking number like, $25.75 or $25.99. The gross profit will be a little stronger and the number may sound a little more credible. However, in a “discount” retail environment, a price of $25.63 could convey the impression that the store has shaved the price to the bone. In the end, pricing is more art than science and requires experience and knowledge of the market.

Different classes of goods may yield different margins. Shoes, for example might be marked up at a factor of 1.67 to yield a 40% gross profit margin. Jewellery might be marked up at a factor of 2.0, yielding a 50% margin. Remember that doubling the cost does not result in 100% profit as many believe. When we refer to gross profit, we assume this means the difference between the selling price and the landed cost and the percentage relates to the selling price, not the cost price.

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