Markup isn't margin: how IMU turns into what you actually earn
Ask five founders what markup they run and you'll get five different answers. There are two ways to calculate it, and only one matches how retailers think. Then comes the bigger problem: the markup you plan is rarely the margin you keep.
Two ways to mark up the same product
Say a unit lands in your warehouse at $25. If you add 100% on top of cost, you sell it for $50. That's cost-plus markup: a percentage of what you paid.
Retail buyers and planners look at the same $50 price differently. Half of that price is markup, so they call it a 50% IMU, or initial markup: the markup expressed as a percentage of the retail price. Same product, same price, two different numbers. If you talk to retailers, you'll want to speak in IMU.
The formula to get from cost to price:
| IMU | Initial retail on a $25 cost |
|---|---|
| 50% | $50.00 |
| 55% | $55.56 |
| 60% | $62.50 |
| 65% | $71.43 |
Notice how quickly the price climbs. Going from 60% to 65% IMU adds almost $9 to the shelf price.
IMU is the plan. AUR is what happens.
IMU is the margin you build in on day one. AUR, or average unit retail, is what you actually collect per unit once the product hits the market: net sales dollars divided by units sold. It almost never equals your initial retail, because:
- Some units sell on markdown or promotion.
- Retail partners take allowances, chargebacks, and damages out of what they pay you.
Here's a simple example using that same $25 unit at a 60% IMU, so an initial retail of $62.50:
- 40% of units sell at 30% off. Across all units, that pulls the average price down 12%.
- Allowances and chargebacks take another 3% of sales.
- Net AUR lands at $53.35, not $62.50.
Your cost is still $25, so you keep $28.35 per unit instead of the $37.50 you planned. Realized margin is 53.1%, not 60%. Nothing went wrong here. That's just what ordinary markdowns and allowances do to margin.
Working backward from the margin you need
Most founders pick a markup first and hope the margin follows. It works better in reverse. Decide the margin you need to keep, estimate your markdowns and allowances, and solve for the IMU:
Price realization is the share of initial retail you actually collect. In the example above it's 88% after markdowns times 97% after allowances, or about 85.4%. To keep a 55% margin:
1 − (0.854 × 0.45) = 61.6% IMU, or an initial retail of $65.08.
That 1.6-point bump in IMU looks small, but it's $2.58 more on the shelf.
The question that comes next
Will your customer pay $65.08? If the answer is no, price isn't the lever. You have three others:
- Landed cost. Every dollar out of cost is worth more than a dollar of price, because it doesn't get marked down.
- Markdown discipline. Buying tighter and planning promotions on purpose usually beats clearing excess later.
- Allowances and chargebacks. These are negotiable, and worth tracking by retailer.
If you sell wholesale, there are two markups
Your retail partner runs this same math on its side. It decides what margin it needs on your product and works backward to the wholesale price it can pay. Your margin has to survive that wholesale price and the markdowns and allowances you fund on top. Founders who model only their own markup tend to find this out after the first purchase order.
Try it with your own numbers. The calculator runs exactly this math.
Open the calculatorThis is a simplified model. It applies markdowns and allowances evenly across all units, and real SKUs, channels, and terms will differ. If you'd like a second set of eyes on your numbers, email me.