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How to set retail prices and markups

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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?

Price tagsHere 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.

November 29, 2010 Filed Under: entrepreneurship, rural, Small Biz 100

2 lenders share secrets to getting a loan

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At the recent Small Business 101 workshop in Alva, Oklahoma, two people with lending experience presented some secrets to getting a small business loan. Maybe these are not really secrets, but they are keys you’ll need to understand to get a small business loan.

Laura Girty, REI
Laura GirtyLaura Girty works with REI, Rural Enterprises of Oklahoma, Inc. I’ve known and worked with Laura for years in local community projects.

REI is a certified development company (CDC) licensed by the US Small Business Administration. They work with SBA and USDA Rural Development Business and Industry loans.

By going through a CDC like REI, you can get longer terms and lower rates than going directly through the bank. Your bank will still be involved, but the guarantee will help make the bank more comfortable, Laura said. People get turned down locally, and go to REI to start the SBA process. Sometimes bankers call directly in order to get the guarantee.

When loaning for blue sky value of an existing business, banks really like to be in partnership with SBA, Laura said. (“Blue sky value” is the value of an existing business over and above what its tangible assets are worth. We also used to call it “good will” in the accounting field.)

Top three reasons for using SBA loan guarantees:

  1. Start up business that has no record of income.
  2. Weak collateral.
  3. Need for longer a repayment period.

Equity requirements
You don’t get to borrow 100% of what you need. Sounds odd, doesn’t it? But what it means is that you have to invest something in the business yourself. Local banks usually require 20% equity. SBA guaranteed loans usually require 10%, Laura said. Some cases require an additional 5% or 10% of equity, like start ups or businesses with specialized facilities (think car washes – hard to make any other business work in a car wash building).

Applying
“I’m finding out that when you’re all done with the (SBA) application, it’s like that (3 inches thick),” Laura said.

“Packaging” lets you fill out one application to seek more than one SBA loan guarantee, like a 504 loan for the building, and a 7(a) on the inventory. If you apply at one time, you can have more than one SBA loan. If you do them separately, there is a certain waiting period.

Kari Roberts, Alfalfa County Bank
Kari RobertsKari Roberts works for a local lender, Alfalfa County Bank, in Cherokee, Oklahoma. Previously, she worked with Laura in her small business. (In a small town, we all have connections.)

Kari repeated a line you’ve probably heard, “The bank is the place you go to borrow money, after you’ve proven you don’t need to borrow the money.”

Documentation
All loans require some type of documentation. For small business loans, that usually means personal and business tax returns for the past three years, and a current credit report.

“If you are going into business, and you are not making your car payments on time, how are you going to make the thousands of dollars right?” Kari asked.

Kari listed the 6 C’s of commercial lending, the factors bankers consider to evaluate your loan application:

  1. collateral, 
  2. capital (personal investment), 
  3. cash flow, 
  4. character (willingness to repay, credit score), 
  5. capacity (legal stuff in order), and 
  6. conditions (economic, etc.).

Looking at the financial statements, the lender will also calculate some basic ratios, like loan to value (80%), and  revenue over payments (120%), Kari said. The ‘loan to value’ ratio means the amount being loaned is not more than 80% of the total value of the business. The ‘revenue over payments’ ratio means that your business generates at least 120% of the loan payment in revenue. You have to be able to make the payments!

Kari repeated that it’s very tough to borrow 100% of what you need for a business. Be prepared to have personal equity to invest.

Know your business
The benefit of doing an SBA loan is, paperwork is so extensive that you are going to know your business inside and out, Kari said.

Photos by Becky McCray.

This article is part of the Small Biz 100, a series of 100 practical hands-on posts for small business people and solo entrepreneurs, whether in a small town, the big city, or in between. If you have questions you’d like us to address in this series, leave a comment or send us an email at becky@smallbizsurvival.com.

December 7, 2009 Filed Under: finance, Small Biz 100

Why you procrastinate on invoicing and what to do about it

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Some of you, and you know who you are, tend to put off one of the single most important business tasks: invoicing. You probably beat yourself up over it, too.

But there is a simple reason you procrastinate on invoicing: it’s not fun.

We like to work on the parts of our business that are fun to us. Even the prospect of, “I have to do this to get paid” isn’t usually enough to keep us from putting off our invoicing.

Does this make us bad business people? No. It’s normal. Here’s a little bit of proof: a professional gardener shared his feelings in a Flickr photo that tells the story, “Dog and I just realized: invoicing is the worst part of the job.”(Click through to read his caption and notes.)

So what do you do about it?

Build a system. Set up the steps that need to be taken throughout the process to make it as easy as possible to figure and send those invoices. And the first step is to create and record some standards of what you charge, whether by the hour or by the finished product or whatever method works best for your business.The second step is a system that makes it easy to record your work just as soon as you do it.

Sample invoiceDo it only once. Record your work in the same format as your invoices so you can copy from your work record and paste directly into the invoice form. (I use this trick, myself!)

Use an online system like Invoice More, Fresh Books, or Greener Billing.

Delegate. If you’re bad enough about procrastinating, pay someone else create invoices from your work records. That could be an employee, a virtual assistant, or your local bookkeeping service.

How do you keep from putting off invoicing? Have any great tricks or stories to share? Or just want to admit that you, too, are human?

This article is part of the Small Biz 100, a series of 100 practical hands-on posts for small business people and solo entrepreneurs. If you have questions you’d like us to address in this series, leave a comment or send us an email at becky@smallbizsurvival.com. This is a community project!

July 20, 2009 Filed Under: entrepreneurship, organization, Small Biz 100

Should I blog for my small business

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Harvest House CafeHow do you tell if a blog is right for your small business? What if you’ve heard of blogs, but aren’t sure what it means? For today’s Small Biz 100, we’re going to go over some small business blog basics.

First, what is a blog? It’s a special type of website, one that is designed to be regularly updated. Posting an update is about the same as writing an email. This site is a blog, and I also use one for my small business, Allen’s Retail Liquors. If you haven’t set up a website before, do get some help at least with the setup.

Now to the big question, should you blog for your small business? Here is one great way to tell. Write down every basic question a customer asks you. Start today, and do this for two weeks. If you end up with a long list of questions you can answer, then you have enough material to start a blog. If you don’t, then a blog may not work as well for.

But what if my customers aren’t online?
Of course, you’d love to have your blog draw more local customers in your front door, or bring you more signed contracts. However, that might not work if you are in a small town with few local people online. Drawing customers isn’t the only purpose to blogging.

Side benefits from blogging

  1. An answer resource for customers.
    The next time a customer asks you a basic question, you can encourage them to read the answer online. 
  2. An answer resource you can publish in many forms.
    Once you’ve written those answers, you can:
    • print them out as handouts
    • compile a short booklet
    • put them on a CD as PDF files
    • make a speech you deliver to educate potential customers.

The one BIG secret to make it work: 
Focus on what customers want to know, not what you want to tell them about your business.

This article is part of the Small Biz 100, a series of 100 practical hands-on posts for small business people and solo entrepreneurs. If you have questions you’d like us to address in this series, leave a comment or send us an email at becky@smallbizsurvival.com. This is a community project!

Photo by Becky McCray.
March 9, 2009 Filed Under: Small Biz 100, social media
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