When
setting prices for your products or services, many small business owners mix up
two key concepts: Markup and Profit Margin. They’re closely
related to profit, but they’re not the same. Let’s break them down with
simple, real-world examples.
What is Markup?
Markup is the percentage you add to the
cost of an item in order to determine its selling price. It doesn’t show how
much profit you’ll actually keep, it simply tells you how much to increase your
cost by to arrive at a selling price.
Markup
formula:
Selling
Price = Cost + (Cost x Markup %)
Example:
Your product costs you $50
(including purchase, shipping, packaging, etc.).
You decide on a 100% markup.
Selling
Price = $50 + ($50 x 100%)
Selling Price = $50 + $50 = $100
So, you’ll
sell it for $100.
⚠️ Important: this does not mean your
profit margin is 100%. That’s a common mistake.
How to Choose the Right Markup?
There’s no
one-size-fits-all answer. It depends on factors like:
Set your
markup too low, and you might barely break even. Too high, and you risk losing
customers. The best approach is to balance and adjust based on your reality.
What is Profit Margin?
Profit
Margin tells you
how much of the selling price actually becomes profit. It’s expressed as a
percentage of the selling price.
Profit
Margin formula:
Profit
Margin (%) = (Profit ÷ Selling Price) x 100
Using the same example:
Selling
price: $100
Cost:
$50
Profit:
$100 – $50 = $50
Profit Margin = ($50 ÷ $100) x 100 = 50%
So, even
with a 100% markup, your profit margin is only 50%.
How Jarbas Makes It Easier
With the Jarbas
App, pricing becomes simple. Just enter:
The
cost of the product
The selling price you want to
set
The app
instantly calculates both your Markup and your Profit Margin.
That way, you know if your price makes sense and if your margin is healthy.
You can
also adjust costs or prices on the spot and immediately see how it impacts your
numbers, all from your phone.