Setting a Retail Price - « back to Articles
There are two key pricing issues that will affect the success of your retail business.
Retail pricing can be defined as:
- What your customers buy often depends on the price you charge.
- How much your customers buy affects the profitability of your business.
The business of selling to a consumer by applying a selling value to the item to be sold.
The right selling price is one that is attractive to customers and allows you to make a profit on a transaction. Staying competitive while ensuring that your selling price more than needed to cover your operating and selling costs is what will determine the final selling price.
Markups & Margins
Retailer's will often use two important terms:
It is important to understand there is a difference between them when you are setting your selling price.
- markup cost
- margin on selling
The difference between cost of merchandise and retail price
Cost of merchandise
The base invoice price minus quantity discounts, plus any freight or duty charges.
To calculate markup on cost as a dollar amount and as a percentage, retailers often use the following formulas:
On the other hand, margin on selling is a calculation that expresses dollar markup as a percentage of your retail selling price. The formula for this calculation is:
- Dollar markup = Retail Price - Cost of merchandise
- Percentage markup = Dollar markup / Cost of merchandise
Margin on selling = Dollar markup / Retail price
Establishing a Markup
When in the process of setting pricing for your products it's important to determine what the typical markup is for the type of merchandise you will be selling. These markups can be found by referring to trade journals, suppliers, retail associations, competitors and management consultants.
To determine what markups are appropriate for your business you must prepare a forecast of annual sales and operating expenses. Then follow these steps carefully:
If your net profit is not sufficient you will need to take measures such as:
- calculate your cost of goods sold
- minus the cost of goods sold from your sales to equal your gross profit
- subtract your expenses from the gross profit to obtain your projected net profit to decide whether or not your operation is viable.
Your business needs to remain flexible and able to adjust the markup you have established as the market place will change from time to time.
- reducing expense
- limiting your personal draws
- changing price policy
- vary the product mix
Price setting can sometimes be a trial and error process. Careful cash flow forecasting and sales projections can help you minimize the risks.