How Stores Price Your Products

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.

As a sales rep, I spent many times explaining to producers that their suggested retail price needed to be at least double their wholesale price or buyers would just not buy!

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!)

$6950  TOTAL

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?

 

 

 

4 comments for “How Stores Price Your Products

  1. August 21, 2014 at 1:21 pm

    How does a 3x markup affect your own retail price (online sales) or is there no need to worry about that scenario since it’s usually more the exception than the rule?

  2. August 21, 2014 at 1:37 pm

    A 3x markup is usually the exception, not the rule.

    Personally, we double the wholesale price plus a bit more (2.2x) on our retail websites. Of course, it depends on the product as well.

  3. July 7, 2015 at 7:35 am

    I am in underwear dropshipping business and I have products listed on Amazon. However I realize that prices are sometimes ridiculous low on Amazon, sometimes lower than wholesale price and they still offer free shipping. How do you explain this?

  4. July 7, 2015 at 9:44 am

    Obviously, they are purchasing their products at a much lower wholesale price that you are receiving from the manufacturer. Or, they may be buying overstocks at a very low price.

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