Written by Ronald L. Bond of Entrepreneur.com
Editor's note: This article has been excerpted from Retail in Detail by Ronald L. Bond.
You often see or hear retailers' advertisements that promise you "quality merchandise at a fair price." Well, just what is a "fair price?" As you enter the retailing arena, you will soon learn that there really is no universally accepted definition. Most of the time the answer is, "It depends..."
It depends on how much you paid for the merchandise, who you bought it from, what your competitors are charging, your overhead expenses, your sales volume and a hundred other variables.
How you establish prices for your merchandise will be one of the most important decisions you will make, since it directly affects that all-important variable, profit. You must strike a delicate balance, setting a price that is high enough to allow you to achieve
a reasonable profit margin and yet low enough to keep your merchandise affordable and competitive.
The Ethics of Markup
Even though there is no hard and fast rule for pricing merchandise, most retailers use a 50% markup, known in the trade as keystone. What this means, in plain language, is doubling your cost to establish the retail price. Because markup is figured as a percentage of the sales price, doubling the cost means a 50% markup. For example, if your cost on an item is $1, your selling price will be $2. Fifty percent of $2 is $1, which is your markup.
This definition of markup was probably developed to avoid using a term that admits to a 100% increase. Most consumers would be appalled that you are selling something for double what you paid for it. They would be inclined to ask why you don't carry a gun and wear a mask. Most consumers have had no exposure to the myriad costs associated with retailing and they are used to thinking in terms of net profit margins they have heard in the media.
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