How to set retail prices and markups

Price tags

Setting retail prices is like some arcane art form. How the heck are you supposed to figure out what to markup items in your retail business when no one wants to give you real numbers?

Here are two starting points for setting retail prices and markups.

Keystoning

Keystone pricing is simple and fairly common. Take the price you paid for an item, double it, and that is your retail price. That’s a markup of 100%.

Now, before you blow a gasket, realize that that is not outrageous. You have to pay all your other expenses out of that: salaries, utilities, advertising, loan payments, and any other expenses. Oh, if there’s anything left over you can think about saving up a cash cushion or even paying yourself a profit.

There are lots of variations for keystone pricing. One small town clothing store I know uses double plus 10%. It is working fairly well for them. They aren’t getting rich, but they are prospering.

But how do you know what is usual in your industry? You can ask other stores in your same retail segment, but in another town. (Pick a town somewhat similar to your own, and fairly far away.) They still may not tell you anything, because retailers are notoriously close-mouthed about markups. But don’t despair. We have another source.

Industry Benchmarks

The Retail Owners Institute has benchmark performance metrics for 52 retail segments publicly available at no cost. [Bless their hearts!] It’s in the section labeled Store Benchmarks.

Find the closest match for your retail segment, then find gross margin. It shows you how much of each sale was left over after paying for the merchandise. That’s an upside down measure of markup.

Let’s work an example. The average gross margin for Gift, Novelty and Souvenir Stores was 47.9% in 2009. So on a $100 item, on average the store paid $52.10 for the merchandise, and had $47.90 in gross margin to pay for everything else. Now we just have to convert that into a markup.

How to translate a gross margin percentage into a markup percentage:

  • Convert the gross margin percent into a decimal:  47.9% = .479
  • Find the gross cost: 1 – .479 = .521
  • Invert it:  1 / .521 = 1.919
  • Subtract one:  1.919 – 1 = 0.919
  • Convert back into a percentage:  0.919 = 91.9%
  • That’s the markup:  91.9%

That’s pretty close to keystone (100%), isn’t it? That’s probably what most gift retailers are using.

So, now some of you are wondering what to do with that markup percentage. That’s pretty easy.

How to figure a retail price from a markup percentage: 

  • Convert the markup percent into a decimal: 91.9% = .919
  • Add one: .919 + 1 = 1.919
  • Multiply 1.919 times the wholesale price.
  • The answer is your retail price.

If this were my store, I’d round off to 92%, 95%, or maybe even 100%. No need to be overly-precise.

All of this is just to give you a starting point. You will want to adjust up or down, based on what makes sense for your business.

Small town retail reality
Generally, a retail store in a smaller town will charge a higher markup than one in a larger urban area. That’s because the small town business has more transportation costs, fewer customers, lower sales volume, or fewer direct competitors. Don’t use that as an excuse, but do take your customer base into account.

Test pricing
So if you were in the gift retail segment, you might take several items and test price them. Multiply the wholesale price by 2 to get your proposed retail price. Compare that to other retailers, including online. Would you be competitive? Would that work for your business?

Now that we’ve gotten you started, it’s up to you. Run the numbers on your business. And if you have any questions or hard-won insights on pricing, please jump right in to the comments. We’d love to hear them.

You’re not alone 
It’s normal for this to be difficult. Here’s a picture with a story from a professional gardener, “Dog and I just realized: invoicing is the worst part of the job.”(Click through to read his caption and notes.) See? You’re not alone. We’re all in this together.

Note: Thank you to the sharp-eyed reader who caught my math error, and suggested the correction. The story been corrected.

This article is part of the Small Biz 100, an on-going series of 100 practical posts for small business people and solo entrepreneurs, whether in a small town, the big city, or in between.

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Comments

  1. says

    Thanks for the explanation of margin and markup, Becky. There is also a huge challenge for service businesses to decide what to charge because there is no cost of goods as a baseline. It’s been my experience that service businesses tend to shoot too low when setting prices. That hurts them in the long-run because they have set a price baseline that is too low.

  2. says

    Jay, you are right that service providers tend to set their prices too low when starting out. We need a whole article on setting service business prices.

    Miss Dazey, glad it’s useful.

  3. Anonymous says

    I have x, price with overhead is $155. If I charge double, 100% does that mean I am getting 50%?

    problem:
    item x $119
    overhead $35.70
    then I add it together 154.70
    mark up/profit on the ITEM ONLY, not on overhead by 175% $207.06
    Add both: 361.76
    add cc fees: 3.6% 13.02
    final price: 374.78

    SHOULD I add mark up and base cost? I feel I’m doing something wrong, but don’t know what it is.

  4. says

    As far as I know, most retailers do not markup their overhead and most take their overhead (including credit card fees) out of the markup. So it would be wholesale cost times markup percentage, or 119 x 1.75 = 208.25.

    That said, there are no rules. Pick a price and test it. That is the only way to find out.

  5. says

    Retail Markups are based on Selling price, not cost. The example shown is a Mark-On. The markup in the example is a 50% markup, meaning that of the retail price 50% is markup and 50% is cost.

    The correct forumula to computer Retail selling price is

    Cost / (1 – Markup) where markup is expressed as a decimal value. A 50 percent markup would be 0.50. To arrive at the selling price, take the cost and divide by (1-.50) or .50 which is to double the cost.

    A 35 percent markup on a 100 item is $100 / (1 – 0.35) = $100 / .65 = $153.85/

    In a retail business income statement, total sales is considered 100%. If all products are marked up using 35% markup as shown the gross margin on sales, that is Sales minus COGS (Cost of Goods Sold) would be 35 percent. This is why markups are computed this way, so there are no surprises when the financial statements are prepared.

    Many sites mistakenly discuss markup as something you add to cost, instead of the slightly more complicated (but accurate) answer that markup is based on selling price, and arriving at the selling price when you know the markup and cost is really COST / (1-MU) instead of COST x (1+MU)

    Look hard, you’ll find the right answer in books written by retail experts.

  6. says

    Jeff, thanks for adding the academic and financial statement definitions. While they don’t help with the practical questions for retail store owners, they add more context.

    • says

      Well, it’s the financial statement definition. So this is how you look at markup after the fact. If you know what the total sales were and what costs turned out to be, you can figure markup from that. But that’s after the sales are made. To me, it’s not particularly useful when you are trying to figure out what price to put on an item to sell.

  7. MIKE LANGFORD says

    How do you figure pricing if you are producing small individual items. The items I am producing cost me .07999¢ each in materials and about 2 minutes to produce. Shipping costs are determined by quanity. How much do I charge if selling them at a retail?
    Thanks,
    Mike Lafoote

  8. Tom Egelhoff says

    Here’s one I’ve had success with.

    How to Calculate Your Ad Budget

    Calculating the Minimum & Maximum to Spend

    This guide will help you compute the minimum and maximum you should spend on advertising based on the margin and markup of your average sale.

    The Company

    $1Million in Sales, Profit Margin of 48%, rent is $36,000 annually.

    Where to Start
    The first thing we must do is compute 10% and 12% of your projected annual, gross sales and multiply each by markup made on the average transaction. 10% of $1M in sales =$100,000; 12% of $1M in Sales = $120,000.

    Convert margin to markup

    Divide Total Gross Profits by Cost. $1M in sales = $480,000 (gross profits) / $520,000 (hard costs) = 92.3% Markup.

    Computing the High and Low You Can Spend

    92.3% times $100,000 (10% of sales) = $93,300
    92.3% times $120,000 (12% of sales) = $110,760

    Final Step – Subtract Your Rent

    Why subtract the rent? At this point you may find you have spent your entire advertising budget on your rent. You might have a small amount left or a sizable figure left. Either way you have a much clearer picture of your advertising budget and how to allocate your funds. Plus the higher your rent the more likely you are to have high visibility. Get a bigger sign.

    Using your calculations from above:

    Low $93,300 minus $36,000 (yearly rent) = $56,300
    High $110,760 minus $36,000 (yearly rent) = $74,760

    The Low You Can Spend On Advertising is $56,300

    The High You Can Spend On Advertising is $74,760

Trackbacks

  1. […] Retail stores in the US can use publicly-available retail markup benchmarks. The Retail Owners Institute offers industry benchmark data in a section called Store Benchmarks. They break down industry averages into 51 different retail lines. They give five years of data for Gross Margin Percentage. This is a great start to compare the markups for any retail store. Read this article for more help with markups and benchmarks. […]

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