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Northstar Tax and Accounting, Snohomish County CPA company

North Star Tax And Accounting

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Markup And Pricing Analysis

Determining the price point to sell a product and service may seem very straightforward.  The reality is somewhat different. Companies use a variety of calculations, reports, equations, and analysis to choose a price for a product.

Demonstrating how markup can affect price and increase sales

Years ago in an interview Warren Buffet explained how price changes as small as a penny has a drastic impact on revenues. He stated that Coca-Cola (which his company owns very many shares of) sell about 1.8 billion units per day. If they could get just one more penny per unit it would equal $18 million dollars a day. Over a year that comes out to $6,570,000,000!

He showed that even something as small as a penny can mean millions in profits when scaled to the number of coke cans sold every day. 

At North Star Tax and Accounting we can help your business determine a good markup by utilizing our professional pricing analytics software and reporting. To determine a product or service markup the first thing we need to understand is what exactly is a markup.     

The simple answer is that it is the price a company charges for a good or service above the price it costs the company to produce that product or service expressed in terms of a percentage.

The equation is:

(Selling price-unit cost)/unit cost *100 = Markup Percentage.

An example might better express this.

Use the example of selling computers to show how markup and gross margins work.

Let’s say we own a company selling computers. The cost for our company to produce one computer is $1,000.00. We sell our computers for $1,200. Our markup percentage would be ($1,200 – $1000)/$1000 which equals ..2 or 20 percent markup.

Now that we understand what a markup percentage is, how can we use that in a real world scenario?  Let’s say your business wants to make 35% on each computer instead of 20%. We can plug in this variable backwards in the equation to see what our selling price needs to be.

35% = (selling price-$1,000)/$1,000

This would show us our selling price would need to be $1,350 to have the correct markup.

Markup is just one part a company needs to understand of how to price a product or service. The other variable is determining what the selling price of a product minus the product cost is as a percentage of revenue instead of cost of production. This is calculation is termed gross margin.

The equation on our example above would be (1,350-$1,000)/$1,350 (instead of /$1,000) to equal a gross margin of 25.9 percent of revenue.

By using these two examples it shows that to generate 25.9 percent revenue on these computers you would have to have a markup or 35 percent. 

Calculating markup pricing and gross profit margins for your business

At North Star Tax and Accounting we help businesses determine using the markup and gross margins calculations, as well as a host of other factors to determine a pricing structure and strategy. We can run numbers a few different ways to help you increase your profits by charging the right price for your product or service.

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Snohomish, Wa Location

2120 Bickford Ave, Snohomish, WA 98290


Bellingham, Wa Location

1334 King St Ste 2 Bellingham, WA, 98229


425-379-8085
info@northstartaxes.com