How markup pricing works
Selling price = cost × (1 + markup %)
Markup is the amount you add on top of cost, written as a percentage of that cost. It suits businesses that buy in finished goods and sell them on, because the cost is known when the price is set: a supplier invoice, a price list or a landed-cost sheet. To find the markup you already have, take the price excluding VAT, subtract the cost, and divide by the cost.
Worked example: brake pads at an auto spares shop
A VAT-registered spares shop in Polokwane buys a set of front brake pads for R420.00 excluding VAT and applies its standard 60% markup. The price before VAT is R420.00 × 1.60 = R672.00. VAT at 15% adds R100.80, so the shelf price is R772.80. The shop keeps R252.00 of gross profit per set, a gross margin of 37.5%.
The owner prefers round prices, so the pads go on the shelf at R780.00. Working back, that is R678.26 before VAT, a real markup of 61.5% and a margin of 38.1%. Use the rounding option above to see the same effect on your own prices.
The markup and margin mix-up
Suppose the owner decides on a 40% gross margin and simply adds 40% to cost. The brake pads would sell for R588.00 excluding VAT. The gross profit is R168.00, and as a share of the price that is a margin of only 28.6%, not 40%.
A 40% margin actually needs a markup of 66.7%, which prices the pads at R700.00, a difference of R112.00 on one set. Across R250,000 of stock sold at cost each month, pricing with the wrong percentage leaves about R66,667 of gross profit on the table every month. The second table above gives the right markup for each margin, and the gross margin calculator works directly from a target margin.
Add VAT last, and only if you are registered
A VAT vendor claims back the input VAT on what it buys, so its real cost is the VAT-exclusive figure. Mark that up, then add 15% output VAT. If the spares shop took the VAT-inclusive cost of R483.00, marked it up by 60% and then added VAT, the shelf price would be R888.72: the customer pays VAT on VAT and the shop looks R116 dearer than a competitor using the same markup.
A business that is not registered cannot claim input VAT, so the VAT it paid is part of its cost. Mark up the full amount paid and charge no VAT on top: only a registered vendor may charge VAT. Untick the VAT box in the calculator to price this way. To move between inclusive and exclusive amounts, use the VAT calculator.
Mark up the landed cost, not the supplier price
For imported stock, the supplier's price is only part of the cost. Take a phone case bought at R38.00 a unit, with R4.50 of freight and R6.20 of customs duty and clearing charges per unit. The landed cost is R48.70. An 80% markup on the supplier price alone gives R68.40, which is a markup of only 40.5% on what the case really cost and a margin of 28.8%. Add packaging, breakage allowances and any card or platform fees charged per sale to the cost before applying the markup.
Choosing a markup that covers your overheads
A markup only sets gross profit. Whether that is enough depends on your rent, salaries and other fixed costs. Work out your expected monthly sales, check the gross profit your markups produce, and compare it with your fixed costs in the break-even calculator. If break-even is higher than the volume you can realistically sell, the markup is too low or the overheads too high.
Frequently asked questions
How do I calculate markup?
Multiply the cost by (1 + markup as a decimal). An item costing R420.00 with a 60% markup sells for R420.00 × 1.60 = R672.00 before VAT. To find the markup on an existing price, divide the difference between price and cost by the cost.
What is the difference between markup and margin?
Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. The rand profit is the same, only the base differs, so markup is always the bigger number. A 60% markup gives a 37.5% margin, and a 100% markup gives a 50% margin.
What markup do I need for a 30% margin?
Divide the margin by (1 minus the margin): 0.30 ÷ 0.70 = 42.9%. The conversion table on this page lists the markup for margins from 10% to 60%.
Do I add VAT before or after the markup?
After. A VAT vendor marks up the cost excluding VAT and then adds 15% VAT to the result. Marking up a VAT-inclusive cost and then adding VAT charges the customer VAT on VAT: on brake pads costing R420.00 plus VAT, the shelf price comes out at R888.72 instead of R772.80.
I am not registered for VAT. How should I price?
Use the full amount you paid the supplier, VAT included, as your cost, because you cannot claim that VAT back. Apply your markup to it and do not add VAT to your selling price. Only a registered vendor may charge VAT or issue a tax invoice.
What is keystone pricing?
Keystone is a retail term for doubling the cost, which is a 100% markup and a 50% gross margin. It is a quick starting point in clothing and gift retail, but whether it is enough depends on your overheads and how much discounting you do later in the season.
Should I use the same markup on every product?
Rarely. Fast-moving items that customers price-check, such as oil filters or bread, usually carry a lower markup, while slow-moving or specialist stock carries a higher one to cover the time it sits on the shelf. What matters is that the blended gross margin across everything you sell covers your fixed costs and leaves a profit.