What is markup?

Definition

Markup is the amount you add to cost to arrive at the selling price. On the books, this is a pricing gap built from cost, not a line you debit and not cash in the drawer.

A sneaker boutique that pays $80 for a pair and tags it at $160 has an $80 gap here. The $80 cost sits in inventory until the pair sells; the $160 is the listed price.

Cash-basis shops may feel the cost when they pay the vendor. Accrual books hold the pair as an asset until a customer takes it, then move that cost to cost of goods sold.

This gap is how the tag is set. It is not the leftover on the Income Statement after the sale, and it is not the share of the selling price.

Where it shows up

P&L: Related to how far the selling price sits above cost.

Balance Sheet: Related to the inventory cost the markup is added to.

See also: Gross Margin · Pricing · Cost Of Goods Sold

When you look at your Income Statement, you do not see a markup account. You see revenue at the tagged price and cost of goods sold at the pair's cost; the gap between those two is the dollar leftover from this add-on.

When the add-on is high relative to cost, the tag sits well above what the boutique paid. When it is thin, the pair was expensive to buy, or the shop is running a sale.

The Balance Sheet holds the cost this gap is added to. Unsold pairs sit in inventory at cost, not at the tagged price.

On the Statement of Cash Flows, paying the vendor and collecting from customers are the cash events. This add-on does not itself move cash until a pair sells.

How it works

The boutique starts with what a pair cost to put on the shelf. That cost can be the vendor invoice, or a fuller landed cost that includes freight and duty.

It then adds a dollar amount, or a percentage of that cost, to reach the tag. A 100 percent add-on on an $80 pair produces a $160 price.

Stay with cost as the base when you read this gap. Gross margin uses the selling price as the base, so the same $80 leftover is 100 percent here and 50 percent there.

Some shops set the add-on from a standard cost instead of last week's invoice. The planned unit cost becomes the number they mark up, even if the latest shipment ran a little high.

A sale later can cut the tagged price without changing the original add-on math. The pair still cost $80; the customer now pays $120, so the realized gap is $40.

After the pair sells, cost of goods sold takes the $80 and revenue takes the tagged amount. The Income Statement leftover is the realized gap, not a separate markup account.

Keep the vendor invoice, the freight bill, and the tag together. Anyone asking why a pair is $160 should see the $80 cost and the add-on that was chosen.

Do not treat the latest invoice as the selling price. The invoice is cost; this figure is what you added on top.

Freight that belongs on the crate raises the cost you mark up. Marking up a too-low invoice leaves no room for the duty that already sat in the landed amount.

Example

A sneaker boutique buys a pair for $80 and wants a 100 percent add-on. It tags the pair at $160.

The dollar markup is $80. That is 100 percent of cost, and it is 50 percent of the selling price.

If the pair is still on the wall, the $80 sits on the Balance Sheet as inventory. The $160 tag is not an asset.

The boutique does not need a separate journal for this add-on. The purchase holds the cost, and the sale later records $160 of revenue and $80 of cost of goods sold.

If a Saturday sale cuts the tag to $120, the realized gap on that pair is $40. The original add-on was still $80; the sale changed what the customer paid.

Common mix-ups

Markup is not the same as gross margin. This figure is the add-on from cost; gross margin is the leftover as a share of the selling price.

Markup is not the selling price. The price is the tag; this figure is only the amount added to cost to get there.

Markup is not cost of goods sold. Cost of goods sold is the pair's cost after it sells; this figure is the gap you planned on top of that cost.

Related terms

• Gross Margin: Gross profit expressed as a percentage of revenue.
• Pricing: The set price charged to customers for a product or service.
• Cost Of Goods Sold: The direct cost of the products sold during the period.
• Gross Profit: Revenue minus the direct cost of delivering it.
• Landed Cost: The full cost of getting a purchased item to your door, including freight and duties.
• Revenue: The total value of goods and services the business earned in a period.
• Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
• Standard Cost: A pre-set expected cost per unit used for planning and comparison.