Learn Small Retail Business Concepts of Pricing After Your Commercial Loan

This is for small retail business owners and for those not familiar with the basic concepts and the math involved in the retail business.  We’ll begin with some definitions you should know.

Markup is the difference between the invoice cost and the original retail price assigned to the merchandise.  Maintained markup is the difference between the invoice cost and the retail sale.  Maintained markup differs from initial markup by the amount of any reductions (markdowns).

For small retail business owners we suggest that you work only with the retail markup percentage.  In small retail businesses one should know that retail markup percentages can be calculated on either a cost basis or a selling price basis.  This is how to figure the retail markup percentage:  retail markup in dollars, divided by the retail selling price, multiplied by 100.  Manufacturers and wholesalers generally compute their markups based on their costs:  retail markup in dollars divided by their cost in dollars, multiplied by 100.  The reason most astute retailers rely on the retail markup approach in doing business is because it is a quick and easy way to see if an item is profitable for them to carry.  However, small retail businesses that sell custom-made items or have direct labor may be better off calculating their markups on a cost basis.

If an item costs $9.50 and you double the cost of goods (this is referred to as keystone pricing) the small retail business owner will sell the item for $19.00.  Your markup in this instance is based on cost, is 100 per cent ($9.50 divided by $9.50 times 100.  The markup percentage based on retail pricing is 50% ($9.50 divided by $19.50 times 100).  Such small retail business owners like computer consultants, embroidery businesses, bakeries, and appliance repair shops use the cost approach.

Small retail business owners follow many and varied practices when it comes to markup.  The following will provide some insight into the problems and possibilities you might face as the owner of a small retail business.

Earlier in this article we used the term keystone.  This simply means to double the price.

If you buy an item a $4.00 and you sell it for $8.00 you have taken a keystone markup.  Small retail business owners, who many times are less sophisticated, use this simple method.  However, the keystone approach does not allow for individual markup selection and often ignores what competitors are doing with identical merchandise.  The keystone method also does not account for the realities of retailing that reduce your margins, such as sell some merchandise at lower-than-retail prices, damaged merchandise, employee discounts and shoplifting.

Particular markup percentages are usual and customary in a number of trade areas.  For instance, the traditional markup for hardware is 40%.  If a small retail business owner

pays $12.00 for a drill, he/she would sell it for $20.00.  For jewelry, the markup range may be 400 percent to 800 percent (it is very hard to compare many items in a jewelry store as opposed to say items in an electronics store).  Those small retail businesses that follow the principle of trade acceptance must be competitive with other competitors in the same trade and do not analyze individual items in determining markup.

There are still other small retail business owners who believe that you should always shoot for the highest price for any item as long as you don’t run off your customers.

Those who are advocates of this theory usually specialize in items that are not familiar to customers and are not handled by competitors.  Caveat Emptor!  Let the buyer beware.

These guys are guided by the law of supply and demand, keeping prices high as long as demand is high and they can get away with it.  Many of these kinds of small retail business owners would rather sell less at higher prices than much lower prices.  Does your business concept fit into this model, or would another markup approach be better.

The danger in the above pricing concept is OK until another major competitor opens his store near yours.  Then, you will be forced to change you concept if he goes after you on price and the customers of yours that this merchant gets may not come back your way.

Food for thought.