We have talked extensively, in past articles, about pricing your products.
But we have never really talked about how stores price your items.
Simple formula: Retailers take your wholesale price and double it to arrive at a retail price. This is called keystoning.
Keystone Pricing or Keystoning: Doubling the wholesale cost by the retailer, which may or may not include shipping fees, depending on the retailer. This is standard markup in some industries, such as gifts. However, in areas with high real estate values, such as large cities in New York, California, or Hawaii retailers often triple the wholesale cost or more.
Some of these inexperienced producers were outraged and wanted to know why retailers increase the price so much — especially after they did all the work in making the product. Here is what I outlined for them:
Please understand that even a SMALL retail store may operate with several thousand dollars a month in overhead. For example:
$1000 Space rent
$1500 1 Employee @ $8/hour (with $1/hour payroll taxes)
$ 300 Utilities (phone, power)
$ 750 Interest on $100,000 of inventory (@ 9% rate)
$ 100 Office & Janitorial Supplies
$ 300 Miscellaneous
$ 500 Advertising/Marketing
$2500 Compensation for owner (if there is any left!)
To make a basic living for the store owner, this fairly typical small store will need to AVERAGE nearly $14,000 per month in sales (based on keystoning), TO JUSTIFY KEEPING THE DOORS OPEN! And the store owner will probably endure slow months where he or she is lucky to do $1000 in sales. Which means customers will need to make up the difference in other months – and the holiday season better be pretty darn good!
These estimates may be very low for some parts of the country or for particular stores.
Buyers tend to have a specific formula for computing wholesale price to retail price for the shops. It was not usually for me to see stores increase wholesale prices 3x for their stores. This especially true for airport shops, mall stores and shops in high rent areas. Some shops add in the shipping and then keystone from that price.
Having a suggested retail pricing for your product is a good idea, but keep in mind that each store will price your products according to their specific store policy.
For more information, you might want to check out the Arts Business Institute article: Who Sets the Retail Price?