What is a Markup?

//What is a Markup?
What is a Markup? 2017-10-06T00:02:54+00:00

Definition: Markup is a term used to define the difference between the cost of any good, service, or financial instrument and its current selling price. In other words, it is the result of subtracting selling price minus cost.

What Does Markup Mean?

What is the definition of markup? Mark-up can also be defined as the gross margin of a sale, but the term is normally used in different contexts. A product markup is added by the retailer to obtain a profit from the transaction. This mark-up can also be expressed as a percentage of the sales price or as a percentage of the cost.

In the financial markets, this term is used to describe the difference between the offering price, which is a price given to market dealers, and the final price the customer pays for the security; this is a regular term used between market participants such as dealers or brokers.

Let’s look at an example.

Example

American Spare Parts Co. is in the business of selling U.S. manufactured aftermarket parts. The company’s best selling products are spark plugs. American Spare Parts buys all its spark plugs, regardless of the model of the car in which they will be used, at $0.5 per unit and sells them at $0.8 per unit. To increase sales, the company is offering a sales promotion for customers buying 4 spark plugs at once. The cost of buying the four units together would be $2.8. What is the company’s current markup per each spark plug sold and how much would it be when the promotion starts?

As we saw previously, the markup formula is sales price minus cost. This means that the current mark-up is $0.3 per spark plug. When the promotion starts the company’s sales price per unit will be $0.7 if the client buys the 4 of them. This means that the mark-up drops for the promotion to $0.2 per spark plug.

Summary Definition

Define Markups: Markup means the excess retail price of a good over the retailer’s cost of the good.