When you run a retail business, setting prices is one of the most important–yet most difficult–tasks you’ll face. Setting retail prices and markups is, in many ways, a lost art form. And while it’s something that every retailer needs to do, it can be difficult to find real numbers and formulas to help you along the way. Coming up with a solid pricing strategy is vital, though, as is understanding demand management in wholesale and retail distribution. If pricing seems to be the bane of your existence, keep reading to learn how to calculate retail price from wholesale and markup!
Keystone Pricing
Keystone pricing, also known as keystoning, is a simple and fairly common pricing method. All you have to do is take the price you paid for your product, such as wholesale t-shirts, and double it to come up with a retail price. This gives you a markup of 100 percent, which might sound extreme, but it isn’t.
As a retailer, you need to sell your merchandise at a price that yields a high enough profit to cover your overhead. You have to pay for employee salaries, advertising, utilities, loan payments…the list goes on and on. And all of that needs to be taken care of before you even pay yourself. When you look at it that way, charging double your cost doesn’t seem so extreme after all, does it?
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Keystone pricing is a good jumping-off point, but it isn’t always the best final price. There are plenty of ways to modify this pricing model to match your unique needs or even to come up with pricing that is comparable to that of your competitors. You might, for example, consider calculating retail price by doubling the wholesale price and adding an additional 10 to 15 percent.
Using Industry Benchmarks
If you’re trying to come up with a pricing strategy that’s more accurate for your industry, consider using industry benchmarks. The Retail Owners Institute shares performance metrics for more than 50 retail segments, and you can use them as a guideline in your own pricing strategy.
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To do this, locate the retail segment that’s closest to the one your business is in. Then, look up the gross margin. This will show you how much money from each sale was left over after accounting for the wholesale price. This is basically an upside-down version of markup.
Let’s make things a bit clearer by taking a look at a real-world example.
In the Gift, Novelty and Souvenir Stores sector, the average gross margin was 47.9 percent in 2009. That means that, on a $100 item, the store had $47.90 left over after making a sale, which sets the wholesale price at $52.10.
We can now use that data to calculate a markup percentage.
First, convert the gross margin percent (47.9 percent) into a decimal (.479).
Then, determine the gross cost by subtracting .479 from 1 to come up with .521.
Divide 1/.521 to come up with 1.919 and then subtract one to come up with .919.
Then, convert .919 back to a percentage: 91.9 percent.
This tells you that the average markup percentage for Gift, Novelty and Souvenir Stores is 91.9 percent. If this is the type of business you run, you can feel pretty confident using that markup percentage to determine your price.
Determining Your Final Price
Once you’ve determined a markup percentage, you can figure out a final price using some basic math:
Convert the markup percent into a decimal and add one. Using the sample above, you would add .919 + 1 to come up with 1.919.
Next, multiply that number times the wholesale price. This will tell you the retail price.
Let’s say you paid $10 for a wholesale crewneck sweatshirt to sell in your gift shop. Multiply $10 times 1.919 to determine a reasonable retail price:
$10 X 1.919 = $19.19
Keep in mind that you don’t have to be that precise. If you discover that the average markup for your industry is, say, 93.76 percent, feel free to round up or down. These formulas should be used as guidelines rather than strict rules.
Conclusion
Pricing merchandise is no easy task. While it’s something that every business owner has to do, most are unwilling to share their specific strategies with others. A great deal of thought and consideration should go into your pricing strategy, but the tips listed above serve as an excellent starting point. Whether you’re decorating canvas bags or reselling kids’ toys, having a solid pricing strategy is a must for any successful business.
