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.
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.
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.
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. Every retail business in a small town struggles with pricing issues. Hundreds of other business owners just like you read this post every week. You’re not alone. We’re all in this together.
Get more retail tips
Want to succeed in small town retail? I have two bonus ebooks that can help you:
- Retail Tips for Small Town Stores Staying Competitive, including 20 Small Town Retail Selling Ideas Under $50
- Three Reasons for Small Town Businesses to Be Open Evenings and Weekends And 11 Ideas to Help You Do It Profitably
Sign up here to get these retail tips ebooks, along with our newsletters and articles:
You’ll get a couple of articles from this site each week delivered via email: small town business, entrepreneurship, tourism, marketing, economic development, and even a weekly chance to share your own good news in the Brag Basket. You’ll also get A Positive View of Rural weekly newsletter with practical steps to shape the future of your town, and Building Possibility weekly newsletter on how you can build possibility in your block, your neighborhood and your town. You can unsubscribe or change your subscription anytime.
I will not sell or rent your name to anyone else because I wouldn’t like that either.
- In an economic crisis, spend your brainpower before your dollars - November 25, 2020
- Video: How to fill empty car dealership buildings for the holidays - November 6, 2020
- How has 2020 changed the challenges rural small towns face? Tell us here - October 20, 2020
- The Idea Friendly Method to surviving a business crisis - October 6, 2020
- Join me for the Rural Renewal Symposium online Oct 13 - September 26, 2020
- Cheap placemaking idea: instant murals - September 11, 2020
- Refilling the rural business pipeline - July 7, 2020
- Huge vacant buildings: grants to renovate? - June 9, 2020
- Economic self defense for small towns - June 7, 2020
- The best things you can do for local businesses in light of coronavirus - March 27, 2020