Definition: Mark up refers to the value that a player adds to the cost price of a product. The value added is called the mark-up. The mark-up added to the cost price usually equals retail price.

For example, a FMCG company sells a bar of soap to the retailer at Rs 10. This is the cost price. The retailer adds Rs 2 as his value and sells the soap to the final consumer at Rs 10. The margin of Rs 2 between the cost price and MRP is the mark-up. In this case, the mark up on the cost price is (2/8= 25%) and on the MRP is 2/10 = 20%.

Markup refers to the cost; margins to the price.

Description: In the example, what is the significance of mark up? The amount of markup allowed to the retailer determines the money he makes from selling every unit of the product.

Higher the markup, greater the cost to the consumer, and greater the money the retailer makes. In FMCG, typically, the MRP is low and the retailer is allowed a lower markup, from anywhere between 5 and 8%. Low margins means a retailer makes less money on every unit, but the number of units sold is very high in FMCG. So overall, the amount of money made evens out.

The price that the market can bear usually determines the selling price, or in India, the Maximum Retail Price (MRP). Companies work backwards and after accounting for production and marketing costs, arrive at values for the players in the FMCG industry- the transport, distributors and retailers.

Strength in the market place also determines the markup and margins allowed. A well-established FMCG company like Hindustan Lever can give less margins to the retailers because the volume of sales of its wide range of products is very high. On the other hand, a new and unknown product and company will need to pay more margins to the retailers to entice them to stock the product in the first place.