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.
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This article is cited in the following academic publications:
- Scaling of Greenhouse Crop Production in Low Sunlight Environments, Kyle A. Alvarado, Aron Mill, Joshua M. Pearce, Alexander Vocaet, David Denkenberger, University of Alaska Fairbanks, pre-print Science of the Total Environment, 2019
- Potential of microbial electrosynthesis for contributing to food production using CO2 during global agriculture-inhibiting disasters, Juan B. García Martínez, Michael M. Brown, Xenia Christodoulou, Kyle A. Alvarado, David C. Denkenberger, Cleaner Engineering and Technology, Volume 4, October 2021
- Synthetic fat from petroleum as a resilient food for global catastrophes: preliminary techno-economic assessment and technology roadmap, Juan B. García Martínez, Kyle A. Alvarado, David C. Denkenberger, University of Alaska Fairbanks, Chemical Engineering Research and Design, 2021
- Methane Single Cell Protein: Potential to Secure a Global Protein Supply Against Catastrophic Food Shocks Juan B. García Martínez, Joshua M. Pearce, James Throup, Jacob Cates, Maximilian Lackner, David C. Denkenberger, Front. Bioeng. Biotechnol., Volume 10 – 2022 | https://doi.org/10.3389/fbioe.2022.906704
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Becky started Small Biz Survival in 2006 to share rural business and community building stories and ideas with other small town business people. She and her husband have a small cattle ranch and are lifelong entrepreneurs. Becky is an international speaker on small business and rural topics.