How to set retail prices and markups

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.