Growing a mid-sized business requires attention to pricing details.

If your finance team and key decision makers haven't reviewed their markup calculations lately, it's time for a refresher. Knowing exactly how much each product you sell costs from suppliers — and its average selling price after applying markup — will quickly provide insights into why your bottom line sits where it does.

You might need to boost those percentages, or ease up to garner more sales.

Here's what you need to know to grow your mid-sized business while keeping value, partnerships, third-party apps, and financial decisions top of mind.

Table of Contents

• What is a markup calculation?
• Why is a markup calculation important for medium-sized businesses?
• How to calculate your selling price
• Markup calculators
• Are markup and gross margin different?
• Use connected solutions to manage your growing business finances
• FAQ

What is a markup calculation?

When you mark up the price of a product, this refers to the percentage increase you add to the base cost — or cost of production (COP) — of the item.

A markup calculation, therefore, is simply figuring out these numbers.

Why is a markup calculation important for medium-sized businesses?

Mid-sized businesses use markup calculations to increase their revenue and ensure they don't lose money on a sale. After all, buyers don't purchase products from suppliers to sell them at cost. A business needs to make money on these purchases.

These added dollars create a positive profit margin and defray costs of expenses, including distribution fees, marketing spend, and administrative salaries.

Adding a markup to the items you sell directly influences your success.

Schedule a time for the finance team to review the company's financial needs and goals routinely (quarterly or biannually). This way, everyone can understand exactly how much markup on the product is required to not just break even on expenses, but to earn a healthy profit so your mid-sized business can grow. 

How to calculate your selling price

It's simple to calculate your selling price using a markup calculation.

The basic formula is:

COP of item x (1 + Markup percentage) = Marked up price

Let's say you're the finance manager for a local automotive parts store and warehouse that employs approximately 50 people, from buyers and inventory specialists to warehouse workers and sales staff running the retail front.

You want to apply a markup to your products to help cover the costs of not only the product, but also staffing the shop, making deliveries to partner automotive repair shops, running the e-commerce portion of the company website, and advertising your items in a car enthusiast magazine.

Example

You already know the COP as dictated by your suppliers and suppliers. For this sample calculation, let's assume your buyers purchase handy 1 litre bottles of conventional passenger vehicle engine oil in a variety of grades and formulas. The most popular bottle on your shelves costs the company $8 per bottle, based on your quantity buying discount.

Now, you might wonder what markup percentage is customary in the formula. This amount is subjective per business based on its expenses, and depends on what the current economy can support. However, a good starting point is 50%.

Let's calculate the selling price of one bottle of car oil with a markup percentage of 50%.

$8 COP x (1 + .50)

$8 COP x 1.50 = $12 Marked up price

In this example, $12 is the final price you would advertise to your customers.

It's worth noting that if you're having a sale or offering a coupon on this product, be sure to never dip below your COP or you'll ultimately lose money on the transaction.

You can avoid this mistake by knowing your markup percentage (in this case 50%) and never offering a sale price more than that percentage.

Average markup percentages by industry

As you decide what markup percentage works for your specific needs, consider these averages used by various medium-sized industries.

Construction: To cover the costs of materials, subcontractors, machine rentals, job site permits, delivery expenses, labour, and overhead expenses — including insurance, work vehicles, and more — consider a markup of around 40% to 45%.

Professional Services: For those operating a service such as a digital marketing agency or IT security firm, all billable time needs to be accounted for, including client briefings, website audits, and performing the core work. The average markup in the professional services industry is around 30%.

Wholesale & Manufacturing: For those managing inventory in a warehouse, it's common to apply a markup percentage ranging from 5% to 40%, depending on the type of products sold, market demand, and competition. 

Markup calculators

As your mid-sized business scales and inventory grows, markup must be applied to your products en masse. While you can use online calculators to play with percentages and see where selling prices land, an accounting solution that automates markup calculation is the most time- and energy-efficient option.

To help you determine the desired selling price for each product listed in your inventory, simply input the COP for each product, along with a few additional revenue figures, and your markup price will calculate automatically with QuickBooks Online Advanced.

In addition to perfecting your pricing with automated markup calculations, you can implement features customized for your industry, from construction and professional services to wholesale and manufacturing.

Are markup and gross margin different?

In a word, yes. With all this talk about markup, it's easy to get the concept confused with gross margin. Many retailers take gross margin (aka category margin), markup, and cost of goods sold into consideration when evaluating pricing strategies.

As a quick reminder:

• Gross/category margin: This is the percentage required to cover your business operating expenses so you can produce a profit and cover your bills.
• Markup: This is the percentage increase you add to the COP of each product you sell.
• Cost of goods sold (COGS): This is the price you pay for the items you source from a supplier or supplier.

In our earlier example with the automotive oil, we calculated a 50% markup on a bottle that had a COP of $8 to create a selling price of $12.

If we use that same product to figure gross margin at a rate of 50%, we use the following formula.

COGS / (1 - Gross margin percentage) = Retail price

$8 / (1 - .50)

$16 Retail price

Here we can see the markup product would sell for $12, and in turn generate $4 for your business, whereas the gross margin would sell at $16, generating $8.

When looking at markup versus gross margin, remember that markup reflects your profit as a percentage of the cost. Gross margin shows your profit as a percentage of the selling price.

Use connected solutions to manage your growing business finances

As your growing mid-sized business evaluates its pricing strategies, consider using automated markup calculations to better understand your financial picture. It's just one simple way your accounting tool can improve workflows.

With QuickBooks you can have:

• Batching of hundreds of transactions to reduce time-consuming manual entries.
• Reporting dashboards and charts tailored to your business's KPIs.
• Integrations with your email marketing provider to stay connected to your customers.
• Automated workflows to boost efficiency, thanks to premade workflow templates or custom-built workflows created for your team's processes.
• Team management for payroll, time tracking, and more.
• A workforce portal so employees can submit their own hours, view paycheques, and access tax forms.
• Connected third-party apps and tools so you can scale your business with ease.
• Securely saved data in the cloud.
• Options to assign tasks to specific users so that delegating work to your finance team is smooth and secure.
• Smart budgeting tools to set and track goals.
• The ability to send data between QuickBooks and Excel with no manual importing.
• Customizable project estimates that easily convert into invoices with online payment options.

Learn more about how QuickBooks can help your medium-sized business. If you're ready to book a consultation, our experts can discuss your finance goals and a tech stack to fit your business style, needs, and budget.

Get in touch with QuickBooks for more information.

Connect with our consultants to discuss your goals, explore solutions, and get started with a QuickBooks tech stack that fits your business and your budget.