Step 1. Figure cost x standard markup
Standard markup is based on the rate of turnover and seasonal factors. The table below indicates what the markup factor is for various ratios of cost of the goods to their sales price:
|Cost of Goods Divided by Sales||Markup Factor|
While you want the markup to approximate industry averages, you don't just want to set them across the board. Markups on slow-moving items must be larger to compensate for the cost of carrying the inventory. Faster moving goods should be priced with a lower markup to meet the competition. The key - find an average target markup for your whole store or operation.
Step 2. Fine-tune the price.
Consider the following elements in setting prices:
- Laws about unfair sales practices
- Buyer's concern for price
- Estimate of service after the sale
- Franchise and manufacturer's recommendations
- Other advantages of your firm (location, convenience, promotion, etc.)
Step 3. Further fine-tune the price.
You have the following options in pricing:
- Price some products low to attract sales
- Get a good buy on certain items, put a higher markup on them, and still sell competitively
- Dump products that are deteriorating or going out of style
- Sell high-turnover items at less than standard markup
Consider price and demand, too. Is the cost important to the customer? It's not necessarily important what you sell something for - what is its total contribution to profits? For example, the owner of a bike shop wants to sell a battery-powered light with a cost to him of $6. He estimates the following scenarios:
|Cost per unit||$6||$6||$6|
|Gross profit per unit||$2||$4||$6|
|Units expected to be sold||170||100||60|
|Contribution to overhead and profits||$340||$400||$360|
Based on this analysis, he found that he shouldn't sell the light for the highest price ($12) or for what will move the most number of units ($8). The best price ($10) maximizes the item's contribution to profit and overhead.