Markup
Markup is the amount added to the cost price of a product to determine its selling price, usually expressed as a percentage of the cost.
Formula
\text{markup amount} = \text{cost} \times \text{markup rate}; \quad \text{selling price} = \text{cost} \times (1 + \text{markup rate})
Definition
Markup is the extra amount a store adds to what it paid for an item (the cost) to set the selling price, covering expenses and profit, usually expressed as a percent of the cost. Formally, markup $M = Cm$ (where $m$ is the markup rate) and selling price $S = C(1 + m)$; markup is based on cost while margin (gross profit percentage) is based on selling price, related by $\text{margin} = m/(1 + m)$ and $m = \text{margin}/(1 - \text{margin})$. In pricing theory, optimal markup follows the Lerner Index, $(P - MC)/P = -1/\epsilon$, where $\epsilon$ is price elasticity of demand: higher elasticity implies a lower optimal markup, a result from microeconomic theory.
Example
A store buying a shirt for $\$20$ (cost) and selling it for $\$30$ has a markup of $\$10$, a markup rate of $\$10/\$20 = 50\%$; note that markup is calculated on the cost while discount is calculated on the selling price, so a $50\%$ markup on $\$20$ is $\$10$, but a $50\%$ discount on $\$30$ would be $\$15$. A $\$40$ cost item marked up $75\%$ sells for $\$70$, a margin of $30/70 = 42.9\%$, quite different from the $75\%$ markup rate. A monopoly facing demand elasticity $\epsilon = -2$ has an optimal Lerner ratio of $(P-MC)/P = 1/2$, so $P = 2MC$: if $MC = \$5$, the optimal price is $\$10$, a $100\%$ markup and $50\%$ margin.
Key Insight
Markup and margin are often confused even by business professionals: a $50\%$ markup is NOT the same as a $50\%$ margin, markup is always a larger percent than the corresponding margin, so when comparing retail performance it is important to clarify which measure is being used. The Lerner pricing rule connects markup directly to market power: in a perfectly competitive market, $\epsilon$ approaches negative infinity and the markup approaches zero ($P = MC$), while monopolies can sustain large markups, a relationship at the core of industrial organization economics.