Comparison of Markup Methods

So why do some use Markup-on-Cost while others use Markup-on-Selling-Price? One answer is that it is a traditional way for resellers in certain industries to discuss how they arrive at price (e.g., “We only make 5% of the price of the product.”). But many feel the reason is that Markup-on-Selling-Price serves as an aid to company promotion because the amount of money a reseller makes is in percentage terms always lower when calculated using Markup-on-Selling-Price than it is with Markup-on-Cost. For example, in the Markup-on-Cost example where the markup is 30% the gross profit is $15 ($65-$50). If the reseller using Markup-on-Selling-Price received a gross profit of $15 their markup would only be 23% ($50/[1.00-.23] = $65).

Consequently, a retailer’s advertisement may say: “We Make Little, But Our Customers Save A Lot” and back this up by saying they only make a small percentage on each sale. When in reality how much they really make in monetary terms may be equal to another retailer who uses Markup-on-Cost and reports a higher markup percentage.

Markup-on-Selling-Price Pricing Method
Cost Pricing: Cost-Plus Method