What is trade margin and its calculation

A mark-up is the difference between the price paid by the seller to the supplier and the selling price of the goods. The seller determines the amount of the markup himself, and the buyers decide for themselves whether the final cost of the goods is suitable for them (except for groups of goods for which the markup is regulated by law). The markup includes not only the seller's profit, but also the costs associated with the sale of goods: taxes, rent of retail space, staff salaries, etc.

Setting a markup on goods allows the seller to:

• cover the costs of selling the goods;
• get a certain percentage of profit from each sale;
• plan his profit on different product groups and on sales in general;
• manage the demand for goods by increasing or decreasing the markup.

How to calculate the retail mark-up on goods
To calculate the markup, the cost of goods is compared to their purchase price. The markup formula is simple:

• Markup = Selling Price - Cost Price.

If a retailer purchased a product at $100 and sold it for $150, the markup per unit was $50.

In addition to retail markup, these types of markups can be calculated:

• Base markup. It provides the seller with the planned rate of profit on the sale of one unit of goods/service. This type of trade markup forms the base price of the goods.
• Additional markup. A mark-up on the base price of a good that is made when the buyer makes additional demands on the good and the seller agrees to fulfil them. For example, the buyer asks to provide the goods in an extended package or with an extended warranty period. In such cases, the cost of goods increases, because the markup takes into account the additional costs of fulfilling the wishes of the customer.
• Intermediary markup. In essence, this is a wholesale mark-up, which is made by the wholesaler to ensure his own profit.

As MAFPELS managers noted, for successful sales on marketplaces it is important for a seller to set a competitive price. Competitor analysis and competent calculation of the markup will help in this, because in the pursuit of an attractive price for buyers it is important to take into account all costs.

What costs appear on marketplaces:

• Marketplace commission. Marketplaces take a commission for helping to find buyers on their site. The size of the commission depends on the type of goods and the chosen scheme of fullfilment.
• Mandatory fees. This includes storage of goods, packaging, delivery. The costs depend on the chosen site.
• Additional fees. These include fines, returns, loss of goods, as well as various unpredictable costs of the shop associated with defects and bringing the goods in accordance with the norms.
• Logistics and packaging costs. This cost item includes: transport costs, warehouse rental costs and product packaging costs.
• Advertising costs and shop promotion. Without advertising and constant measures to promote the shop, it is impossible to keep the product card on the top positions in the marketplace search engine.

After finding out the gross costs, the retailer needs to determine how much merchandise to purchase to cover the costs and start making a profit. The projected costs then need to be divided by the quantity of goods purchased. This is the way to determine the retail trade margin on the goods, Mafpels Cyprus managers summarised.

In addition to marketplace costs, ecommerce sellers incur the same costs as offline businesses. These include employee salaries and taxes.