MCH320_Ch02

CHAPTER 2

Retail Pricing

13

ObjectivesAfter completing this chapter, the student will be able to

define the price elements of retail, cost, and markup calculate retail price from cost and markup use spreadsheets as a format for the retail, cost, and markup relationship identify types of markup identify methods for pricing decisions explain factors affecting the three price elements

Retail pricing is fundamental to the retail sale of merchandise, to the satisfaction ofthe consumer, and to the profitability of the business. For example, a buyer shops themarket and selects a group of picture frames to be sold for the next season, and a re-tail price of $30.00 is assigned to each frame. The process seems simple, but the re-sults have far-reaching implications on the well being of the store and its entire retailorganization. With many items, the primary focus of the buyers decision making ison the selection of the item based upon the style, color, size, and other features thatwill be in demand by the consumer. Style and color are the first characteristics noticedby the consumer when shopping for many items and are often the characteristics thatgive the item appeal when displayed in the store. In the market, the buyer will view alarge variety of items with many characteristics. Selecting the right items for the storestarget consumer is one of the keys to success in retail.

Determining which item will sell is a challenge for all who must forecast and buyfor retail sales. Yet, the price of the item is equally important. The right item at thewrong price will not sell. Although assigning a retail price seems simple, it is as chal-lenging as determining the right item. Pricing decisions involve three retail price ele-ments: retail price, wholesale cost, and markup. Determining the right price includes avariety of activities: (a) understanding the retail price elements, (b) identifying thetypes of markup, (c) establishing a basis or method for all pricing decisions, and (d) ex-amining factors affecting the three price elements.

KINC02-013-035v4 7/21/03 1:40 PM Page 13

Merchandising Math: A Managerial Approach, by Doris H. Kincade, Fay Y. Gibson, and Ginger A. Woodard. Copyright 2004 by Pearson Education Inc., Published by Prentice Hall.

14 CHAPTER 2

Retail Price ElementsThe retail price must contain the wholesale cost of the item and the markup as-signed to the item. The wholesale cost of the item is generally called cost ofgoods or cost, a generic term that will be used regardless of the type of item thatis purchased. In retailing, cost of goods is always used to refer to the wholesalecost. This cost is the price of the item charged by the wholesaler, manufacturer,or other distributor, and it represents the price that the retail buyer paid for theitem. Cost of goods includes the invoice value of the item, which is also calledthe list price, the transportation, and often the cost of insurance to cover themerchandise while it is being shipped by the vendor or manufacturer to the retailer.

Markup includes operating expenses, retail reductions (i.e., markdowns,discounts, and shortages), and profit. Markup is the difference between the retailprice and the cost of goods sold. As will be mentioned in the methods of pricingsection, the markup may be established by one of several methods, for example,component addition, price lining, and market pricing. With the component ad-dition method, markup is built from the value of needed expenses. In price liningand market pricing, markup is the result of the difference between cost and theestablished retail price. Markup may be set as a single amount for every item, re-gardless of type or classification of merchandise; however, a fixed or singlemarkup is usually used only with like or similar items within a merchandise clas-sification. Markup may also be fixed as equal to the cost of the merchandise. Thismethod is known as a keystone markup or a markup that doubles the invoicedcost of the item to achieve the retail price. Alternatively, markup may vary acrossthe same classifications and/or other merchandise categories. Markup, within onestore, may be different for many items. Markup may also change for an item asthe season and the level of sales change or during price adjustments such as mark-downs, special promotions, or other price changes. Many methods are used tofind markup, but the formula, which represents the relationship among the priceelements, is the same in each situation. The formula for retail dollars is

Through algebraic changes, the retail dollars formula can be rewritten to solve formarkup dollars and for cost dollars. The formula for markup dollars is

In addition, the formula for cost dollars is

If any two of the three retail elements (i.e., retail dollars, cost dollars, or markup dol-lars) are given, the other element can be identified. This situation of knowing onlytwo of the three price elements could occur when the buyer wanted to have new mer-chandise at the same retail price as some previous merchandise. The buyer wouldknow the needed markup and the retail price, and would need to determine what wasthe right cost for the new merchandise.

Cost $ = Retail $ - Markup $

Markup $ = Retail $ - Cost $

Retail $ = Cost $ + Markup $

KINC02-013-035v4 7/21/03 1:40 PM Page 14

RETAIL PRICING 15

Sample Problems: Retail Price Elements

Problem 1

On a recent trip to the market, the buyer for a retail store purchased a group of shirts.Each shirt has a wholesale cost of $15.00. A keystone markup is used by the store;therefore, the markup on a shirt is $15.00. What is the retail price of the shirt?

(Hint: Insert the values for cost and markup from the preceding situation.)

Problem 2

The same buyer purchased a group of candles at a cost of $13.50 per candle for a sug-gested retail price of $29.99 per candle. What is the necessary markup for one candle?

(Hint: Through algebraic changes, formula can be rewritten to solve formarkup $.)

(Hint: Insert the values for cost and markup from the preceding situation.)

Problem 3

A buyer finds linen tablecloths at a cost of $50.00. A keystone markup will be used.What is the markup? What is the retail price?

(Hint: Keystoning means that the markup is the same as the cost.)

Problem 4

Hoping to build multiple sales opportunities, another buyer for the same retail storepurchased casual pants to coordinate with the shirts in Problem 1. The pants were re-tailed with a keystone markup on $48.00. What is the cost of each pair of pants?

(Hint: Keystone is doubling the invoiced cost of the item. In this situa-tion, calculate markup $ by finding one/half or 50% of the retail price.)

The retail price elements can also be viewed as percentages. Percentages are useful formaking comparisons across items, across departments, and across stores. The retail price isthe base of the relationship and represents 100% of the price. Using the retail price as a

Cost $ = $24.00 Cost $ = $48.00 - $24.00

Cost $ = Retail $ - Markup $

Retail $ = $100.00 Retail $ = $50.00 + $50.00 Retail $ = Cost $ + Markup $

Markup $ = $16.49 Markup $ = $29.99 - $13.50

Markup $ = Retail $ - Cost $


Retail $ = $30.00 Retail $ = $15.00 + $15.00


KINC02-013-035v4 7/21/03 1:40 PM Page 15

16 CHAPTER 2

base is common for many retailers. The cost of goods can be used as a base, but this pric-ing situation is more common in manufacturing companies than for retailing companies.Traditionally, fashion goods manufacturers have focused their pricing methods on thecomponent addition method because the cost of labor is an extremely important elementin determining the overall cost of the item. For the work in this text, the percentages areexpressed at two decimal places. This format is equivalent with the two decimals used forall dollar amounts. The formula for retail price percentages is

Sample Problems: Retail Price Elements as Percentages

Problem 1

A small picture frame is assigned the markup percentage of 45.30%, and the cost percent-age is 54.70%. By applying the formula, a retail percentage of 100.00% can be confirmed.

(Hint: Insert the percentages from the aforementioned situation into theformula.)

(Hint: By adding cost percentage and markup percentage, the retail percentageof 100% is confirmed.)

Problem 2

A sofa pillow with ruffles has a cost percentage of 38.80%. The retail percentage isknown to be 100.00%. What is the markup percentage for this product?

(Hint: Using algebraic rules for solving equations, the percentage formulacan be rewritten to solve for markup percentage. In this situation, issubtracted from both sides, and results in a zero.)

(Hint: The resulting formula solves for Markup %. Further uses of thistype of algebraic manipulation will not be discussed.)

(Hint: The percentages from Problem 2 can be inserted into the formula.)

Problem 3

The standard markup percentage for the store is 45.50%. An umbrella is sold in thestore at $50.00. What is the cost percentage of the umbrella?

(Hint: Retail percentage is 100%.)

(Hint: Using algebraic rules, the formula can be rewritten to solve forcost percentage.)

Retail % = Cost % + Markup %

Markup % = 61.20% Markup % = 100.00% - 38.80%

Markup % = Retail % - Cost %

Retail % - Cost % = (Cost % - Cost %) + Markup %

Cost % - Cost %Cost %


Retail % = 100.00% Retail % = 54.70% + 45.30%



KINC02-013-035v4 7/21/03 1:40 PM Page 16

RETAIL PRICING 17

(Hint: Percentages from Problem 3 can be inserted into the formula.)

In many situations for a company, the buyers, managers, and top administrationwill use both dollar amounts and percentages for the retail price elements in theirstudy of the pricing situation. The consumer will not see this format. In those studies,the dollar values of cost and markup are expressed as percentages of the retail price.The retail price can be viewed as the base for the relationship among the three priceelements, and markup and cost percentages are rates. With this relationship, retailprices, costs, and markups can be calculated from (a) industry standards or (b) per-centages established by company policy.

Percentages are also used to make comparisons of cost and markups that aredetermined from different retail price bases. Consider the following example: Themarkup on a $48.00 dust ruffle is $21.00 and the markup on an $8.00 face clothis $5.00. The dust ruffle appears to have the higher markup when comparing themarkup dollar amounts, but if the percentages of markup are compared, the facecloth may have a higher, lower, or similar markup. The formula for calculatingmarkup percentage (based on retail) when markup dollars and retail dollars aregiven is

The formula for calculating cost percentage (based on retail) when wholesale cost andretail price are given is

Sample Problems: Retail Price Elements as Percentages

Problem 1

Calculate the markup percentage on the dust ruffle with a markup of $21.00 and aretail price of $48.00.

(Hint: In the application of another algebraic rule, the result of the ratio divi-sion must be multiplied by 100 to convert the decimal result to a percentage.)

Problem 2

Calculate the markup percentage on the face cloth with a markup of $5.00 and aretail price of $8.00.

Which item, the face cloth or the dust ruffle, had the higher markup percentage?Ans: The face cloth!

Markup % = 62.50% Markup % = $5.00>$8.00 * 100 Markup % = Markup $>Retail $ * 100

Markup % = 43.75%

Markup % = $21.00>$48.00 * 100 Markup % = Markup $>Retail $ * 100

Cost % = Cost $>Retail $ * 100

Markup % = Markup $>Retail $ * 100

Cost % = 54.50% Cost % = 100.00% - 45.50%

Cost % = Retail % - Markup %

KINC02-013-035v4 7/21/03 1:40 PM Page 17

18 CHAPTER 2

Problem 3

A home furnishings buyer purchased a coverlet for $55.00 (at cost) and plans to retailit for $125.00. What is the markup percentage?

(Hint: The retail price dollars formula will first be needed to find the value of markup. So,use Markup $ Retail $ Cost $ and insert the known values from Problem 3.)

(Hint: The markup percentage can be calculated with the markup per-centage formula.)

Problem 4

The cost of a blue vase is $12.00. The vase retails for $50.00. What is the costpercentage?

Frequently the buyer or merchandise planner will have a mixture of pricing in-formation about a product. For example, the merchandise planner will know the an-ticipated retail price and will need to determine the potential markup dollars or costpercentage. The buyer may know the cost in dollar and the markup percentage andwill need to determine the retail price. Although these combinations of variables inthe retail price relationship can be confusing, the buyer or planner will be followinga generic or basic format with each of these calculations. The basic format can be ex-pressed with the base dollars always being the retail price and the rate being any per-centage, for example, markup percentage or cost percentage. The results dollars fromthese calculations will be in correspondence to the rate. If the rate is markup percent-age, the results are markup dollars. If the rate is cost percentage, the results are costdollars. The rate and the results are considered a pair and must be the same variable,differing only in percentage or dollar format.

The basic formula for expressing this retail price relationship in both dollarsand percentages is

By inserting the terms for the price elements and through algebraic manipula-tion, the formula can be rewritten to solve for each retail element. The price relation-ship formula to find cost dollars and percentage is

The price relationship formula to find markup dollars and percentage is

Markup $ = Retail $ * Markup %

Cost $ = Retail $ * Cost %

Results $ = Base $ * Rate %

Cost % = 24.00% Cost % = $12.00>$50.00 * 100 Cost % = Cost $>Retail $ * 100

Markup % = 56.00% Markup % = $70.00>$125.00 * 100 Markup % = Markup $>Retail $ * 100

Markup $ = $70.00 Markup $ = $125.00 - $55.00 Markup $ = Retail $ - Cost $

-=

KINC02-013-035v4 7/21/03 1:40 PM Page 18

Elements Dollars $ Percentages %RetailCostMarkup=

-

RETAIL PRICING 19

SpreadsheetsThe relationships among the three price elements can be best expressed in a spreadsheet-type format. Spreadsheets, written by hand or developed on a computer, are used bymany companies to display financial information. Software for spreadsheet programs(e.g., Excel, dBase, Quattro Pro, and Lotus) is available for most computers. Althougheach program has some unique features, most of their basic operations are similar. Someretail companies may have their own proprietary software with computer programswritten especially for that company, but regardless of how sophisticated a companysspreadsheet may appear, the basic format is usually the same. For pricing calculations,the price elements are shown on the rows of the spreadsheet, and the dollars and per-centages are shown in the columns.

A spreadsheet for the dollars and percentages of the pricing elements could ap-pear as the spreadsheet in Figure 2.1. This spreadsheet can be used for expressing theprice relationship and calculating changes to that relationship.

After known values for each price element are entered into the appropriate cells,formulas are used in the remaining blank cells to complete the spreadsheet and deter-mine the additional information needed. The use of a computer spreadsheet allowsthe decision maker to enter alternative values and rapidly make changes based on theresults. Furthermore, information can be added to the spreadsheet over time, and ad-justments can be made when prices change. The use of the spreadsheet also provides aready source of information when past records are used in current buying decisions.

Sample Problem: Retail Price Elements in Dollars and Percentages

A tie has a markup of 38.80% and a retail price of $18.50. What is the markup in dol-lars for the tie? To use the spreadsheet format, follow these three steps:

Step 1. Write the spreadsheet format.

Step 2. Insert the known values from the problem.

(Remember: Retail % 100%.)=Retail $ = $18.50 Markup % = 38.80%


-

Figure 2.1

Spreadsheet for the Pricing Elements.

KINC02-013-035v4 7/21/03 1:40 PM Page 19

20 CHAPTER 2

Step 3. Use the relationship formula to solve for the unknown values.

The relationship of dollars and percentages is very specific. When the retaildollars are known, markup percentage can be used to find markup dollars, and costpercentage can be used to find cost dollars. In the previous problem, markup dollarsand markup percentages are now known, and retail dollars and percentages areknown. To complete the spreadsheet and find the values for cost, additional calcula-tions using the retail dollar formula, the retail percentage formula, and the relation-ship formula are used.

Sample Problem: Finding Cost when Retail and Markup Are Known

Using the spreadsheet from the previous problem, what are cost dollars and costpercentage?

The following steps are used to solve this problem:

Step 1. Use the retail percentage formula.

(Hint: Rewritten, this formula can be used to solve for cost percentage.)

Enter the value into the spreadsheet.

Cost % = 61.20% Cost % = 100.00% - 38.80% Cost % = Retail % - Markup %


Elements Dollars $ Percentages %Retail $18.50 100.00%CostMarkup $7.18 38.80%=

-

Elements Dollars $ Percentages %Retail $18.50 100.00%CostMarkup $7.18 38.80%=

-

Markup $ = $7.18 Markup $ = $18.50 * 38.80% Markup $ = Retail $ * Markup %

Elements Dollars $ Percentages %Retail $18.50 100.00%CostMarkup 38.80%=

-

KINC02-013-035v4 7/21/03 1:40 PM Page 20

RETAIL PRICING 21

Step 2. Use the relationship formula.

Enter the value into the spreadsheet.

Step 3. Use the retail dollar formula to check the solution.

(Hint: Small difference in value may appear due to rounding dollar amountsand percentages.)

The spreadsheet format may be used to calculate any of the missing values in thepricing relationship. For example, the buyer may have a preset markup (markup per-centage) and a price point (retail dollars) that must be achieved. Before shopping foran item, the buyer must know the maximum cost that the item can have. The follow-ing problem provides an example of this situation.

Sample Problem: Finding Cost when Retail Price and Markup Percentage Are Known

A hand-painted box has a markup of 68.50% and a retail price of $48.50. What is themaximum cost in dollars that the buyer may pay for the box, and what is the markupdollar value?

Step 1. Use the spreadsheet format.

Step 2. Enter the values from the problem.

(Remember: Retail % 100%.)=Retail $ = $48.50 Markup % = 68.50%


-

Retail $ = $18.50 Retail $ = $11.32 + $7.18 Retail $ = Cost $ + Markup $

Elements Dollars $ Percentages %Retail $18.50 100.00%Cost $11.32 61.20%Markup $7.18 38.80%=

-

Cost $ = $11.32 Cost $ = $18.50 * 61.20% Cost $ = Retail $ * Cost %

Elements Dollars $ Percentages %Retail $18.50 100.00%Cost 61.20%Markup $7.18 38.80%=

-

KINC02-013-035v4 7/21/03 1:40 PM Page 21

22 CHAPTER 2

Step 3. Find the percentage associated with the cost.

Step 4. Use the relationship formula.

Step 5. Find the value of the remaining cell.

Using the same spreadsheet format, a retail buyer can also calculate retail dollarson specific items to reach a planned markup percentage goal. This goal is usually es-tablished by the buyer with the input from management, or by management alone,prior to the beginning of a new retail year. Markup is always reviewed before calculat-ing buying plans and attending markets.


-

Markup $ = $33.22 Markup $ = $48.50 - $15.28 Markup $ = Retail $ - Cost $Retail $ = Cost $ + Markup $

Elements Dollars $ Percentages %Retail $48.50 100.00%Cost $15.28 31.50%Markup 68.50%=

-

Cost $ = $15.28 Cost $ = $48.50 * 31.50% Cost $ = Retail $ * Cost %

Elements Dollars $ Percentages %Retail $48.50 100.00%Cost 31.50%Markup 68.50%=

-

Cost % = 31.50%Cost % = 100.00% - 68.50%Cost % = Retail % - Markup % Retail % = Cost % + Markup %

Elements Dollars $ Percentages %Retail $48.50 100.00%CostMarkup 68.50%=

-

KINC02-013-035v4 7/21/03 1:40 PM Page 22

RETAIL PRICING 23

The retail dollar formula, when cost dollars and needed markup percentage areknown, is

or

Sample Problem: Calculating Retail Dollars when Cost Dollars and Markup Percentages Are Known

The buyer purchases a tote bag at the market for $75.00. Bags must have a 56.00%markup. What is the projected retail price if this markup in used?

Step 1. Use the spreadsheet format.

Step 2. Insert the known values from the problem.

(Remember: Retail % 100%.)

Step 3. Calculate the percentage associated with the cost dollars.

Step 4. Use the relationship formula to calculate retail dollars.

(Manipulate with algebra.)

Retail $ = $170.45 Retail $ = $75.00>44.00% Retail $ = Cost $>Cost %Cost $ = Retail $ * Cost %

Elements Dollars $ Percentages %Retail 100.00%Cost $75.00 44.00%Markup 56.00%=

-

Cost % = 44.00% Cost % = 100.00% - 56.00% Cost % = Retail % - Markup %

Elements Dollars $ Percentages %Retail 100.00%Cost $75.00Markup 56.00%=

-

=

Cost $ = $75.00 Markup % = 56.00%


-

Retail $ = Cost $>(100.00% - Markup %)

Retail $ = Cost $>Cost %

KINC02-013-035v4 7/21/03 1:40 PM Page 23

24 CHAPTER 2

(Note: Many retailers would round or adjust the retail price to either $170.00 or $171.00to bring the retail price within the desired price line.)

Step 5. Calculate the value of markup dollars (the remaining cell).

With any method of price setting, the target consumer must be kept in mind be-cause the objective of retailing is satisfying the target consumer. The retail price, regard-less of how it is established, must seem appropriate to the consumer. While shopping, theconsumer will observe an item and look at the price. The two factors, appearance (espe-cially color) and price, must seem logical to the consumer. If the price is judged too highfor the item, the consumer may refuse to buy. Some consumers may decide to wait forthe item to be marked down, select a similar but lower cost item, or leave the store with-out making any purchases. Any of these three scenarios will result in less sales for thecompany. If the consumer judges that the price is too low, the consumer may question ifthe quality of the item is different from what is expected, if the item is mislabeled, or ifthe item has a hidden defect. For brand name products, the prestige of a brand can bedamaged in the consumers mind if the price seems to be too low or too high. Getting theconsumer to perceive the price as right for the quality or value of the item is a very riskybut vitally important retail decision.

Types of MarkupMarkup, in general, is the difference between the cost of goods and retail price.Markup has a variety of specialized names that correspond to the uses and situationsfor each markup. Individual markup is the markup found on one item or one stock-keeping unit (SKU). For example, a pair of bookends has a retail price of $20.00 anda cost of $8.00; therefore, this item has a dollar markup of $12.00. The $12.00 repre-sents an individual markup. When multiple units are considered together, the markupis a gross markup. If 15 pairs of bookends have individual markups of $12.00, thegross markup for the lot of bookends is $180.00. A gross markup may be calculatedfor multiple units in lots of merchandise, for an entire department, for all merchan-dise in a store, or for all merchandise in a company.

The formula for calculating gross markup dollars is

Gross markup $ = Markup A $ + Markup B $ + + Markup X $


-

Markup $ = $95.45 Markup $ = $170.45 - $75.00 Markup $ = Retail $ - Cost $

Elements Dollars $ Percentages %Retail $170.45 100.00%Cost $75.00 44.00%Markup 56.00%=

-

KINC02-013-035v4 7/21/03 1:40 PM Page 24

Order Form for the Costume Jewelry Department

Item Quantity Wholesale Cost Total Cost Retail Price Total RetailEarrings 25 $15.00Necklaces 15 $25.00Pins 20 $18.50Overall Total

RETAIL PRICING 25

If the markup on each item is the same, the formula can be expressed as

Sample Problem: Gross Markup

A store sells 22 coffee makers from the houseware section. Each coffee maker wasfrom a well-known national brand and had a markup of $24.80. What is the GrossMarkup dollars for the 22 appliances?

Most of the time, identical or similar items within a specific classification, such asbrand name appliances, differ in cost when purchased at wholesale from each manufac-turer or vendor. Sometimes private label merchandise has a lower wholesale cost andcan have a higher markup than branded merchandise of the same or similar classifica-tion. For example, within the housewares department, several types of houseware items,such as toasters, coffee makers, and can openers with different costs and retail prices arepurchased on one order form. Additionally, within any given store or department, nu-merous orders can be found with varying wholesale costs and various retail prices.

In each of these instances with multiple but diverse units within one purchaseby the buyer, the retailer cannot calculate a single gross markup percentage by averag-ing markup percentages on individual items. Markup percentages can only be aver-aged when quantities are the same for every item or SKU. Markup percentage onindividual items with varying costs and retail prices will differ from the markup per-centage on the total group of items.

The next problem illustrates a method for determining markup percentage on agroup of items with varying costs or retail prices.

Step 1. Calculate the retail price for each of the itemsStep 2. Calculate total retail of all itemsStep 3. Calculate total cost of all itemsStep 4. Calculate the overall total cost and overall total retailStep 5. Calculate total markup dollarsStep 6. Calculate markup percentage for total items or order(s)

Sample Problem: Markup Percentage on Group of Items with Varying Costs and Retail Prices

A buyer purchased the following items for a costume jewelry department. Each itemwill be retailed at a keystone markup plus $5.00. What is the gross markup dollars forthe order? What is the markup percentage for the order?

Gross Markup $ = $545.60 Gross Markup $ = $24.80 * 22 Gross Markup $ = Markup $ per Unit * # of Units

Gross Markup $ = Markup $ per Unit * # of Units

KINC02-013-035v4 7/21/03 1:40 PM Page 25

26 CHAPTER 2

Step 1. Calculate the total retail of the items.

(Hint: Keystone wholesale cost then add $5.00 to calculate retail for each item.)

Step 2. Insert costs, number of units, and retail price into order form.

= $37.00 + $5.00 = $42.00$18.50 * 2Pins= $50.00 + $5.00 = $55.00$25.00 * 2Necklaces= $30.00 + $5.00 = $35.00$15.00 * 2 (keystone)Earrings

Step 4. Calculate the total cost dollars and insert the results into the spreadsheet.

Total Cost $ # of Units Unit Cost $

For example, earrings: 25 * $15.00 = $375.00

*=

Step 3. Calculate the total retail dollars and insert the values into the spreadsheet.

Total Retail $ # of Units Retail $ per Unit

s

(Note: When these calculations are done on a computer, the formula can beentered to multiply one cell [quantity] times another cell [retail price].)

20 * $42.00 = $840.00 Pin15 * $55.00 = $825.00Necklaces25 * $35.00 = $875.00Earrings

*=


Item Quantity Wholesale Cost Total Cost Retail Price Total RetailEarrings 25 $15.00 $35.00Necklaces 15 $25.00 $55.00Pins 20 $18.50 $42.00Overall Total


Item Quantity Wholesale Cost Total Cost Retail Price Total RetailEarrings 25 $15.00 $35.00 $875.00Necklaces 15 $25.00 $55.00 $825.00Pins 20 $18.50 $42.00 $840.00Overall Total


Item Quantity Wholesale Cost Total Cost Retail Price Total RetailEarrings 25 $15.00 $375.00 $35.00 $875.00Necklaces 15 $25.00 $375.00 $55.00 $825.00Pins 20 $18.50 $370.00 $42.00 $840.00Overall Total

KINC02-013-035v4 7/21/03 1:40 PM Page 26

RETAIL PRICING 27

Step 5. Calculate the overall total cost and overall total retail.

(Hint: Sum the total cost and the total retail columns.)

Step 6. Calculate the total markup dollars.

Step 7. Calculate the total markup percentage.

(Note: If the buyer were trying to achieve a markup percentage goal of 55%, thegoal would be achieved on this order.)

Closely related to gross markup is initial markup, which is calculated usingthe initial or first retail price of all items at a point in time. This markup is basedon gross sales and is used at the beginning of a selling period. Gross sales are all po-tential retail sales based on the initial retail prices. This initial markup covers ad-justments for planned markdowns and other reductions that may occur later in theselling period. When an initial markup is based on actual retail sales for a periodand not on initial retail prices, the markup is called a gross margin. Actual retailsales are also called net sales because gross sales have been adjusted for markdownsand for other losses.

The formula for calculating gross margin dollars is

For a successful retail business, gross margin must be large enough to include thevalue of operating expenses, profits, and taxes.

Maintained markup is used to calculate the markups that can be achieved afteradjusting for the charges of servicing the fashion goods. These charges can include al-teration expenses and cash discounts. Cumulative or average markups are calculatedfor a group of items with different markups at a point in time. Cumulative markup iscalculated after the beginning of each major delivery period or selling period. In thiscase, the cumulative markup includes the markup on the beginning inventory, whichis usually at retail dollars and is based on book value of the inventory or actual physi-cal inventory calculations. Cumulative markup is the difference between the total costof purchases and total retail dollars of all merchandise in stock during a given time

Gross Margin $ = Net Sales $ - Cost of Goods Sold $

Total Markup % = 55.91% Total Markup % = $1,420.00>$2,540.00 * 100 Total Markup % = Total Markup $>Total Retail $ * 100

Total Markup $ = $1,420.00 Total Markup $ = $2,540.00 - $1,120.00 Total Markup $ = Total Retail $ - Total Cost $


Item Quantity Wholesale Cost Total Cost Retail Price Total RetailEarrings 25 $15.00 $375.00 $35.00 $875.00Necklaces 15 $25.00 $375.00 $55.00 $825.00Pins 20 $18.50 $370.00 $42.00 $840.00Overall Total $1,120.00 $2,540.00

KINC02-013-035v4 7/21/03 1:40 PM Page 27

28 CHAPTER 2

period. This markup is used to calculate a final markup when markups have changedover time. Gross, initial, maintained, and cumulative/average markups will be dis-cussed in later chapters.

Methods for Pricing DecisionsThe method used to determine price may be based on company policy, the judgmentof top management, the classification of the merchandise, or the type of store in whichthe merchandise is being sold. For example, fashion goods usually have a highermarkup than basic goods. National brands are sold at relatively the same retail price bymost retailers within a particular geographic area, because the wholesale and trans-portation costs for the items are usually the same or very comparable for all of these re-tailers. Private label merchandise may be priced to help the retailer achieve a highermarkup to compensate for markdowns, slow-selling merchandise, or poor selectionsfrom incorrect buying decisions. Private label merchandise may also be priced to reflectthe best quality at the best available price for a specific product classification. In thiscase, the retail price is probably based on the firms policy to utilize its private brandmerchandise to build store traffic and store image and to maintain a substantial targetcustomer base. Certain types or classifications of merchandise have a higher risk of theftand must be stored, merchandised, or displayed differently from most merchandise.Selling and visual presentation costs for merchandise such as jewelry and cosmetics,which are housed in glass display cases, are usually higher for the retailer. For these rea-sons, methods of determining price vary across store and merchandise classifications.The buyer may or may not have a choice in the selection of the method, but shouldhave knowledge of the methods and the characteristics of the methods. Retail pricingmethods include component addition, past records, price points, or market value.

Component addition builds the price of each item in the inventory from the costof the item and the needed markup. This method is often used when a retailer is openinga new business and has limited past experience with pricing. A variation of this method,called activity-based accounting, is used to determine whether individual products, cate-gories of merchandise, or departments are contributing their appropriate share of markupto the business. With component addition, the decision maker, the buyer or manager, ex-amines what expenses must be covered by the retail price. A portion of the retail price foreach item sold in the store must contribute to the income needed to cover the overall ex-penses of the store and to provide enough income for the desired profit. The retail pricemust also include enough money to cover the wholesale cost of the item.

Component addition can be a very exacting calculation or it can be a rule ofthumb type calculation. For some stores, the markup is an automatic 50% of retailprice. This 50% markup is called a keystone markup (as described earlier). Using akeystone markup, the cost of the item would be doubled to yield the retail price. Inreality, keystone markup is rarely used for all items in the store. Even when the key-stone markup is used as a starting point, the final or maintained markup for an item,a department, a store, or an entire company will be affected by losses and markdowns.

The amount of contribution from each item may vary depending on the type ofmerchandise and the activities needed to purchase, carry, or sell the merchandise.Some items contribute less to the overall income of the store because they are de-signed for promotional sales or as attention getters. When these items are sold atwholesale cost or below, they are called loss leaders. This pricing is designed to bringconsumers into the store. Some retailers believe that loss leaders create a larger salesvolume and entice consumers, once they are in the store, to buy higher priced items

KINC02-013-035v4 7/21/03 1:40 PM Page 28

RETAIL PRICING 29

that may have higher markups. With this technique, both markup and sales volumeare maintained or boosted. Other retailers are concerned that loss leaders can damagethe high fashion image of a store because price is often used by the consumer to eval-uate the fashion or quality level of a store or item.

Past records, for a store with a sales history, provide a record of accomplishment forthe sale of similar items. These records will include retail prices, numbers of items sold atthe price, and adjustments that were made to the price throughout the season. Recordswill also indicate the number of unsold items. In the past records method, the historicalretail records are used as a starting point for establishing current retail prices. The actualprice must be adjusted for environment, market, product changes, inflation, competi-tion, and style features. A pricing decision on current items is always somewhat differentfrom any previous sale of a similar or even identical item. If a $30.00 shirt from one yearis carried in the store the next year, the retail price may be adjusted upward to includedollars to provide for inflation, growth, or other changes in the store. On the other hand,the retailer may make a conscious decision to maintain the original retail price in hopesof building additional sales volume or store traffic that will offset the lower markup.

The position of the merchandise in regard to its stage in the product life cyclemust be analyzed before establishing a new retail price. New items just appearing inthe store and considered fashion forward can carry a higher retail price than items thathave been in the store for a period or have been on the market for an extended period.(The items that have been sold over time may be entering the latter part of their prod-uct life cycle and demand for them may be diminishing.) The retailer must also con-sider whether a customer can recognize the item as part of last years line. Thisrecognition will diminish the retailers image of being fashion forward.

Adjustments that are made to the past retail price are often made by estimationsand overall merchandising judgment. Scientific or statistical data may not be availableor simply not considered when setting new retail prices. Regardless of the methodused, past records are always helpful as a point of comparison; however, the decisionmaker must remember that past records are not always indications of future sales andthat fashion goods require that the pricing decision be a constantly evolving process.

Price points, or price lines, are levels used for groups of merchandise and areused by department stores and other stores with a wide variety of fashion goods tohelp the consumer discriminate among the similar items. The levels of price points areset at low, moderate, and high. Within one store, shirts may sell at each of three sepa-rate price points. These price points are established by starting with a price floor andsubsequently increasing the price of similar, but more costly goods to higher and dis-tinctly different price points. Fashion goods sold at separate price points must appearsignificantly different to the consumer. The styles of three price point shirts may besimilar, but details will vary. A shirt at the lowest price point may have a fiber contentof 50% polyester and 50% cotton with limited trim and plastic buttons. A shirt at themiddle price point may be 100% cotton. The shirt at the top price point would be of100% pima cotton and have eyelet trim with fabric-covered buttons.

Most department stores would house these shirts in separate departments basedupon demographics, psychographics, lifestyles, and physical characteristics of the tar-get consumer. In addition, the fashion awareness level of the consumer as well as thestage in which the merchandise falls on the fashion curve would be considered. Basedupon fashion detailing, price, and size, the pima cotton shirt would probably befound in a Designer, Bridge, or Contemporary Department. The 100% cotton,middle price point, shirt would then be put in the Better Department, and thecotton/polyester blend shirt would be in the Moderate Sportswear Department. Pricepoints for such items and other items in the store may be established at the corporatelevel for multiunit stores. This method is useful for stores that maintain a standard-ized image across store units.

KINC02-013-035v4 7/21/03 1:40 PM Page 29

30 CHAPTER 2

Market pricing is often used for popular fashion goods and new items, or in high-ly competitive markets. The retail price is established by estimating the price desired bythe target market. The question that retailers pose is what will the market bear? Theretailer must determine what is the highest possible price that can be placed on an itemand still have that item be attractive and buyable by the consumer. If the price is toohigh, the consumer will not purchase the item even if it is highly desirable from a fash-ion perspective. Knowing what is too high is a difficult process and requires market re-search, in-depth knowledge of the target consumer, and an excellent fashion sense by theretailer or buyer. On very new items, the retail price may be higher than the price will belater in the season because the item is projected to be very popular. In such a case, theconsumer is expected to pay extra for the privilege of buying this item early in the sea-son. Exclusive and unique fashion goods may also be priced higher than the more basicmerchandise because the popularity of these items is subject to rapid change and theitems are at risk for higher than usual markdowns later in the season. Overall, marketpriced items may have an average markup that is similar to the store average because ofthe high initial markup where some merchandise is sold and the lower final markupwhen the remaining merchandise is sold. The task of the retailer is to select a marketprice that will maximize the target market demand early in the selling season and leavevery limited amounts of merchandise for drastic markdowns late in the season.

A higher markup on these trendy items also helps to offset the higher promo-tional and advertising costs needed to sell the more fashion forward merchandise.This method also requires a review of the companys marketing strategies. Marketpricing may also be set by evaluating the prices of the competition. The retail pricemay be set higher, lower, or the same as the prices for similar items in the competitorsstore. This decision is made relative to the strategic plan of the retailer and the posi-tioning of the business. (See Chapter 5.) Determining markdowns and other aspectsof pricing strategies are discussed in later chapters.

Determining the exact retail price for an item is an important step in sellingmerchandise. The retail price of an item affects its salability, the stores image, and theoverall profitability of the store. The retail price of an item must be established beforethe merchandise is placed in the store, which further adds to the risky and speculativenature of the pricing decision. Although past records, current pricing policies, marketconditions, expenses, and other factors are considered, the final decision in establish-ing a retail price must depend on the judgment of a person. Underlying all the previ-ously described pricing methods is the need for the buyer or merchandiser who setsprices to possess knowledge of the item, the store, the market, and the consumer.

Factors Affecting the Three Price ElementsRetail price, cost of goods, and markup are affected by numerous factors in the busi-ness world. These retail price elements are interrelated; therefore, an adjustment inone element can cause the need for adjustments in one or two of the other elements.Decisions to make such changes should be carefully weighted for all the potential re-sults. For example, a change in cost of goods can affect the retail price of those goods.If the cost of goods or markup must be adjusted upward, the retail price will have acorresponding rise to maintain the overall value. In periods of inflation, the rise incost of goods is common as the manufacturer passes the increased costs of manufac-turing to the retailer. The retailer may also have increased costs of doing business,such as wage increases and rent increases. The resulting rise in retail price could place

KINC02-013-035v4 7/21/03 1:40 PM Page 30

RETAIL PRICING 31

the retail price of the item outside of the intended price line or higher than the priceof similar items at the competitors stores.

For example, a brand name basketball with a $30.00 retail price, last season, had awholesale cost of $15.00. The buyer found a cost increase of $4.00 at the next market.The new cost of the ball is $19.00. If markup dollars are kept constant for the next sea-son, the ball has a new retail price of $34.00. If other brands of balls selling for $30.00did not have a cost increase in the market, this ball may now be above the price pointrange for similar items. The buyer may wish to keep the brand name ball in the group ofballs and must consider numerous factors before selecting a new retail price. The buyerhas several options (a) lower the markup on this ball and raise the markup on other items,(b) raise the markup on all balls, or (c) keep the standard markup and hope the consumerwill not be disturbed by a $4.00 price difference among similar items.

In competitive markets and periods of economic tension, consumers may notbe willing to accept price increases. If the retail price must remain constant, either ofthe remaining price elements or both elements must experience a drop. For instance,consumers of apparel are becoming more demanding about price. Many consumerswill not buy if the price is perceived as too high. As retailers review their pricing deci-sions, many buyers have had to seek lower priced merchandise. The lower priced mer-chandise may assist the retailer in achieving the desired retail price, but the lowerpriced merchandise may have a lower quality than previous items. The consumer isbecoming more educated and may notice the drop in quality. This action can nega-tively affect the overall image of the store as well as the sales volume and profit. An al-ternative to changing merchandise is to lower markups. A lower markup can beachieved with lowering operating expenses or reducing profit.

An alternative action is to buy off-price, first quality merchandise up front or atthe beginning of the season. In order to obtain larger orders or to build larger volume,manufacturers sometimes will offer off-price packages of current, first quality merchan-dise up front or when the buyer is placing a regular order for seasonal merchandise.Many times the amount of off-price merchandise that can be purchased by the retaileris based upon the dollar or unit amount of the initial season order that is placed at reg-ular price. The off-price merchandise is usually offered to the retailer at 20% to 30% offthe wholesale cost of the merchandise and may or may not be identical in style, color,or content as the other seasonal merchandise. Also, the off-price merchandise may ormay not be delivered to the retailer at the same time as the initial order. Regardless ofthe time for shipping, the off-price goods can be retailed at the same retail price as theinitial order, and the retailer will have a higher initial markup on this group of mer-chandise. The retailer can use the higher markup to offset the drop in sales volume cre-ated by higher wholesale costs and the resulting higher retail price of other items.

Retail price is related to sales volume. A rise in retail price will often lead to adrop in the overall sales volume. When retail prices rise, consumers tend to buy feweritems than when prices remain stable. If the store could sell 10 items at $30.00, thetotal sales would be $300.00, and the total markup may be $150.00. If the rise in costof goods, as described previously, creates a new retail price of $34.00, the store maysell only seven items. The total sales would be $238. If the markup dollars per itemremained at $15.00, the total markup would then be $105.00 for the seven items.This example illustrates how a rise in retail price could actually create a drop in theoverall sales for the store. A drop in the sales volume can result in a drop in gross mar-gin. This drop in margin can affect the amount of profit a store makes.

Profit can be made in two ways, many small markups or a few large markups. Thelarge discount stores use the method of many small markups. They depend on high vol-ume of sales for many, small, individual markups. The small stores or individual boutiqueshave higher individual markups, but have fewer sales. In a competitive market, the middle

KINC02-013-035v4 7/21/03 1:40 PM Page 31

32 CHAPTER 2

position of moderate markups with moderate number of sales is a difficult position forsuccess. A clear store image and selection of desired merchandise is hard to maintain withthis price structure. Department stores have used this moderate price structure and havefound that their customers are being drawn away by retailers with lower retail prices.

Changes in retail price may also affect operating expenses and cost of goods.Items with high retail prices are associated, in the consumers mind, with higher levelsof service than items with lower retail prices. Consumers expect an upscale, high-fashion store to have high prices; new, expensive furnishings; and plenty of skilledsales associates. Most importantly, service in retail is directly associated with the num-ber and qualifications of the sales associates. To provide excellent customer service,sales associates must be selected carefully and trained continually. Qualified sales asso-ciates will require higher wages than unqualified staff. Training requires both time andmoney. To maintain high levels of service, the markups on items must be largeenough to cover these operating expenses.

Higher priced goods are also associated in the consumers mind with higherquality goods. Fashion items that have and maintain high quality are usually highercost goods. Higher quality for an apparel item can be more expensive fabric or fibers,for example, cashmere instead of acrylic. Higher quality for a bath towel could bedeep pile and luxurious hand. Higher quality in an appliance might be more options,improved styling, and use of materials that are more expensive. (For example, themanufacturer might use pewter on a trim instead of plastic.) Improved quality canalso be achieved with new designs, improved fit or size, and improved construction.All of these factors are achieved by the manufacturer with increased costs. Higherpriced goods can also be associated with newness of fashion, licenses for new images,or use of established brands. In a competitive market, the manufacturer can insist onhigher prices for these quality features.

In addition, high priced goods require a more expensive store image. Con-sumers equate high prices with evidence of luxury. Luxury in retail image can beachieved through new and exciting signs, fixtures, lights, and other store features. Forexample, the size and decor of the dressing room can convey an image to the con-sumer. A large dressing room with soft lighting and nice furniture tells the consumerthat this is an upscale store with high quality merchandise. To achieve and maintainsuch a retail image, markups and other adjustments must be large enough to cover theinflated operating expenses and costs.

SummaryEstablishing the retail price of an item is a very important decision. The three price el-ements of retail price, cost, and markup must be examined. Retail price is the initialprice of an item in the store. Cost of goods is the wholesale price of an item. Markupcan vary from individual markup to gross margin and is used to cover the operatingexpenses and profits needed for a store. These three elements can be expressed in dol-lars and percentages and can be calculated based on their relationships. However, anappropriate retail price is more than just a mathematical calculation. The retail priceaffects the store image and the purchasing behavior of the consumer. A retail pricethat is too high can reduce overall revenues. A retail price that is too low can rob thestore of markup dollars needed to pay the operating expenses and to supply a profit.Therefore, the right price must be determined to motivate a purchase from the con-sumer and make a profit for the store. Merchandising judgment, along with mathe-matical ability, is needed to establish the optimum retail price that will be at a levelappropriate for the target consumer, the store, the merchandise, and the marketplace.

KINC02-013-035v4 7/21/03 1:40 PM Page 32

RETAIL PRICING 33

Key TermsActivity-based accountingAverage markupComponent additionCompetitive marketsCostCost of goodsCumulative markupGross marginGross markup

Higher priced goodsIndividual markupInitial markupKeystone markupLoss leadersMaintained markupMarket pricingMarkupNet sales

Past recordsPast records methodPeriods of inflationPrice linesPrice pointsRetail price elementsRetail price relationshipSales volumeSpreadsheet

Discussion Questions1. What are the three price elements?2. Why does a store need markup?3. Who determines the cost of an item?4. Why is setting the retail price an important con-

sideration for a store?5. What are the methods for setting the retail price?6. How can the retail price be set for an item that has

been carried in the store for several seasons?

7. What is the best method for setting the retail pricefor a new fashion item?

8. What information is needed to determine the bestretail price for an item?

9. If the cost of an item has an increase, what willhappen to the retail price? Why?

10. Why do small stores have higher markups thanlarge discount stores?

Exercises

Price Elements1. A small briefcase has a cost of $25.00 and the markup is $21.00. What is the

retail price of the briefcase?

2. A pair of pajamas has a markup of $22.00 and a cost of $18.00. What is the retailprice?

3. A coat retails for $129.00, and the cost is $65.40. What are the markup dollars?

4. A suit has a markup percent of 43.30% and a retail price of $256.00. What is thecost percent?

5. A wallet item retails for $22.68. What is the cost of the item when the cost per-cent is 53.00%?

6. The newest vase in the store has a retail price of $56.98. The markup percent forthe vase is 42.50%. What are the markup dollars?

7. An item has a retail price of $23.50 and a markup of 34.50%. What are themarkup dollars?

8. A pair of gloves has a retail price of $34.50. The standard markup on gloves is52.50%. What is the cost of the gloves?

9. A set of dishes costs $29.50, and the standard store markup is 45.50%. What willbe the retail price of the dishes?

KINC02-013-035v4 7/21/03 1:40 PM Page 33

34 CHAPTER 2

Computer ExercisesGeneral Directions

Set up the following retail price spreadsheet using a computer spreadsheet program. Save your work on your disk.

10. A pair of boots had a cost of $89.00 and cost percent of 42.50%. What is theretail price?

11. For a special sale, the buyer bought at the market 10 dozen pairs of socks for$224.50. The markup for the sale is 45.00%. What will be the retail price for onepair of socks?

12. The buyer finds a line of picture frames at the cost of $12.74 per frame. Thebuyer thinks that the frames can be retailed for $45.00. What should be the ex-pected markup percent?

13. What is the markup percent for shorts that cost $255.00 a dozen and retail for$34.60 per pair of shorts?

14. The baby department received a shipment of stuffed toys that each costs $8.50and retailed for $22.30. What is the markup percent?

15. The buyer found a line of childrens stuffed toys for $40.00 a dozen. The retailprice of one toy is set at $7.55. What is the markup percent?

Individual Markup to Gross Markup1. The buyer had a $12.00 markup on each book. Ten books were sold. What was

the total markup?

2. A department contained 160 handbags. Each handbag had a $25.50 markup.What was the total potential markup (gross margin) for the department?

3. If each handbag in Problem 2 retailed for $65.00, what was the total retail salespotential for the department?

4. What is markup percent (gross markup percent) for the handbag department inProblem 2?

5. A retail store sells every item for $6.00. Last year, the store had retail sales for theyear of $484,878.00. How many units were sold?

6. A buyer found a source that has belts priced at $12.00 per dozen. If the buyerspends $4,000.00 with this vendor, how many belts will be purchased?

7. If the markup on one fur coat is $680.00, how many coats will the store have tosell for a gross markup of $1.5 million?

8. If the markup for a solid color tie is $4.00, what is the potential gross markup forthe department if 200 solid colored ties are bought?

9. If the markup for a striped tie is $4.90, what is the potential gross markup for thedepartment if 160 striped ties are sold?

10. Which group of ties (the ties in Problem 8 or 9) has the potential for a greatergross markup for the store? Why?

KINC02-013-035v4 7/21/03 1:40 PM Page 34

RETAIL PRICING 35

You should have one file for all problems. Just scroll down to the rows below thefirst problem to start the second problem. Number each problem.

In the upper right corner of the spreadsheet, place your name, date, and file name. A single problem should be printed on one page. You may have multiple prob-

lems on one page, but you should not split a problem across two pages.

$ %Retail 100.00%CostMarkup=

-

Price Elements1. What are markup and cost percentages on a rug at $126.95 retail and $56.00 cost?

2. The cost of a blanket is $43.00, and the retail price is $82.00. What is the costpercent for the blanket? What are the markup dollars and the markup percentagefor the blanket?

3. What are markup and cost percentages for shorts that cost $255.00 a dozen andretail for $34.60 each?

4. For a special sale, the buyer got 10 dozen pairs of socks for $224.50. Markup forthe sale is 45.00%. What are the retail price and cost percentage for the socks?

5. The buyer wants to have a line of bags that sell for $79.00 per bag. The regularmarkup on a bag for the department is 43.50%. What is the maximum cost thatthe buyer may pay for one bag?

6. A set of sheets is found in the market at $45.00 a set. Using market pricing, thebuyer thinks that these sheets may retail for $70.00. What is the maximummarkup percentage that this pricing will achieve?

7. Gold jewelry is very popular with a stores customers. The buyer wants to get ahigher markup than in the past. A ring is purchased in the market at cost for$150.00. The usual store markup is 76.00%. What would be the retail price withthe usual markup? What is the price if the markup is 96.00%?

8. Place mats cost $1.50 in the market. The buyer finds some mats in a new colorand wants to sell these at a higher price point than the mats in current colors. Usechanges in markup percents to show how two separate price points can be usedwith one cost.

9. The standard retail price of dress boots is $250.00 for a shoe department. Thebuyer needs to get a markup percent of 43.50%. What is the cost the buyer canpay to achieve this markup?

10. The department markup on mens wing tip shoes is 68.00%. One group of shoeshas a retail price point of $198.00. What should be the cost of shoes to use thismarkup? The buyer also wants shoes at the $250.00 and $380.00 retail pricepoints. Keeping the same markup percent, what would happen to the potentialcosts of these two groups of shoes?

KINC02-013-035v4 7/21/03 1:40 PM Page 35

Documents

MCH320_Ch02