What is a mark-up?

A mark-up works up from cost: you add a percentage or an amount to a cost item. That can be the purchase price of material, for sawing, stockholding and price risk; a subcontracted operation, for ordering, transport and checking; or the whole cost, for overhead and profit. A 25 per cent mark-up on a cost of 100 euros gives 125 euros. The margin on that price is 20 per cent, because margin is measured on the selling price. Converted: mark-up = margin / (1 − margin).

How does a mark-up work in practice?

Mark-ups compound when you apply one to a base that already contains another. For example, 10 per cent on material followed by 15 per cent on the whole cost marks the material up by just over 26 per cent in total. Confusing mark-up with margin leads to prices that are too high or too low: a 20 per cent margin needs a 25 per cent mark-up. Watch for double counting as well: if saw loss is already in the material line, it does not belong in the mark-up again. Note what each mark-up covers.

What is a mark-up often confused with?

Mark-up is not margin: mark-up is a percentage of cost, margin a percentage of the selling price. A risk allowance is a particular kind of mark-up: it covers a named uncertainty in the work, where an ordinary mark-up covers known costs or profit.