How to Calculate Markup: Formula, Examples, and Common Mistakes (2026)

Markup is gross profit expressed as a percentage of cost: (price − cost) ÷ cost. Run it forward to price from a known cost with price = cost × (1 + markup), and run it backward from a margin target with markup = margin ÷ (1 − margin). The formula takes seconds; the accuracy comes entirely from what you put in the cost base.

The Three Calculations You Actually Need

First, markup from a known price and cost. Second, price from a cost and a chosen markup. Third — the one most businesses skip — the markup required to produce a specific gross margin. That third conversion is where money is won or lost, because margin targets are set in board meetings and markups are applied on the shop floor.

Building the Cost Base Before You Mark Up

A markup applied to the supplier invoice alone silently gives away several points of margin. The correct base is landed unit cost: invoice price plus inbound freight, duty, customs brokerage, and any per-unit handling, adjusted for expected shrinkage or breakage.

1. Start with the supplier invoice price per unit, net of volume rebates you are certain to earn.
2. Add inbound freight allocated across the units in the shipment, not across the year.
3. Add duty, brokerage, and any per-shipment fees divided by unit count.
4. Add expected loss: if 2% of units arrive damaged, divide the landed cost by 0.98 to cover it.
5. Convert your target margin into a markup, apply it, then verify the margin on the resulting price before publishing it.

                Supplier invoice: $18.40 per unit
Inbound freight: $2,100 across 1,200 units = $1.75 per unit
Import duty at 6.5% of invoice: $1.20 per unit
Landed cost: $18.40 + $1.75 + $1.20 = $21.35
Target gross margin: 45%
Required markup: 0.45 / 0.55 = 81.8%
Price: $21.35 x 1.818 = $38.81
Check: ($38.81 - $21.35) / $38.81 = 45.0%
              

Marking up the $18.40 invoice cost instead of the $21.35 landed cost at the same 81.8% gives a price of $33.45 and a real margin of 36.2% — a shortfall of 8.8 percentage points that no report would flag.

Four Mistakes That Erase the Margin

• Applying the markup to invoice cost instead of landed cost, which costs the freight and duty percentage in margin.
• Treating the markup percentage as if it were the margin percentage — an 8.8 point gap at 50% markup, and it widens as markup rises.
• Marking up a cost figure that already includes allocated fixed overhead, which double counts overhead in the price.
• Leaving payment processing out of the calculation: 2.9% plus $0.30 on a $38.81 order is $1.43, or 3.7% of price.
• Never re-running the markup after an input cost change, so the intended margin quietly decays with every supplier increase.

Matching the Cost Base to Your Books

IRS rules for inventory cost of goods sold generally require freight-in and other acquisition costs to be capitalised into inventory rather than expensed separately, which means the cost base on the tax return is close to landed cost. Pricing from the supplier invoice while reporting cost of goods sold at landed cost guarantees the gross margin in the accounts comes in below the one in the price list. Align both to landed cost and the two figures reconcile.

Set a standing rule: recalculate markups whenever landed cost moves more than 3%, and audit the cost base itself once a year against actual freight invoices.