Few retail business challenges are trickier than setting prices. To find the right markup, divide your monthly business costs into a single unit of product whose sales rate you dont know. Then figure out how your markups on one product affect customers decisions to purchase other products. You'll set and change prices according to your customers demands and the threat of your competitors. If you want someone to tell you the exact markup percentages to use, plenty of easy answers are out there -- but you wont find many good ones.
Get some pricing data for the products you plan to stock. When your markups run too low, you deprive yourself of revenues -- and you may alienate your customers later on when you raise prices. Markups that run too high reduce sales, as more customers decide that the price isnt right for your goods.
To get the data you need, check your area to see what other retailers are charging. Dont bother with big-box stores; they have a different business structure and arent comparable with traditional retailers.
If prices for a given product tend to be stable across multiple shops, charge a comparable price, at least initially. For variably priced products, aim somewhere in the middle after accounting for demographic differences such as location. For products that no one else is selling, find comparable alternatives and use those as a baseline.
Once you start collecting your own data from the sales at your shop, fine-tune your markups, pricing top sellers higher and marking down or giving sluggish items a new marketing twist. The process of fine-tuning never ends, continually adjusting your prices to reflect market conditions.
Gather sales volume data. No single markup pays your business costs. Your money comes from a variety of products sold in a range of quantities -- a number that varies every month. Your markups must work together because your sales will always be diverse.
When you look at your competitors shelves, take note of the quantities and variety they stock. A bottle of designer imported soy sauce with only one or two more bottles on the shelf behind it makes for a stark contrast with the 10 jugs of bargain-brand soy sauce sitting nearby. It may be pricey, but stocking the designer brand, although in limited quantities, allows for customer satisfaction, and that extra sale might come at a higher profit to you due to a comfortable markup and associated purchases.
Make an estimation for each product you plan to stock of the number of units you can reasonably expect to sell in an average month -- or an average quarter or year, if possible, because using longer time frames evens out short-term fluctuations. Account for seasonal variations and for holidays. Repeat this estimation at several price points to help give you an idea of the sweet spot of maximum profit: the point at which you're charging a markup that's high enough markup that each sale is lucrative, but low enough that you still generate a lot of sales.
This step requires statistical analysis -- modeling a series of natural processes according to a distribution of probabilities -- and though you can do it yourself, you may want to hire a consultant or statistician. Whoever does the analysis will need data, and lots of it. Competitors' data can be useful, but you need data from your own shop: Keep detailed digital records of your business transactions with customers from start to finish.
When you begin a new business, you wont know how much of any given product your customers will buy. The only things you can expect are a slow startup period and variance in your customers purchasing patterns. Use statistical analysis to make your marketing guesses as educated as possible.
Analyze your business costs to determine the revenues you need to break even to determine the dollar figure that your combined revenues need to hit. Aside from the fixed elements of your business -- the lights, the rent, the insurance -- your variable costs mainly depend on your sales volume. More sales, for example, means that you have to spend more money to buy more product. You may also need to hire more workers to stock your shelves and operate the cash registers.
If your markups on the products you sell dont cover the costs of running your business, you wont be in business for long. Note the important caveat on the products you sell. The products you dont sell dont make you any money. Sometimes that means an expired product that you have to get rid of, which is a total loss. More often, though, it means a product that may or may not eventually sell -- perhaps at a clearance price -- but which spends so much time on the shelf that its costing you money just by taking up valuable space that could be used on products that sell better.
Make an estimation as to what kinds of products are likely to sell together. The right markup for any one product belongs to a much bigger picture. Your top interest as a retailer is to get customers into your shop buying things. The amount of money you make or lose on any given sale is less important than the amount you make from all sales combined.
A crafty markup can persuade customers to make purchases they wouldnt otherwise make. By understanding how one product's price can affect a customers decision to buy a completely different product, set your markups so that customers spend more money on more products than they otherwise would.
Your business plan can help you with this. In it, identify your model customer and consider the kinds of demands that would bring her to your shop.
Set individual product markups in parts. First, set the wholesale price. You shouldnt be selling a product below its purchase cost unless you are trying to use it as a lure to get customers to buy other things.
Next, compare the two hypothetical prices you have already identified -- the price that your competitors are charging, and the price based on your estimation from Step 3 for maximizing profits on that one product, in isolation. If the two prices are in close agreement, raise your markup to that level. If they dont agree and the competitor price is lower, ask yourself if a customer is likely to build store loyalty on this particular product, and proceed from there.
With your psychological analysis of likely combinations from Step 5, make adjustments to individual product markups to increase customers overall purchases. Usually this means marking down one or two products in a group to act as lures for the other products. This is very much a trial-and-error exercise.
Finally, add your estimates for all products to determine how much money you expect to make in your opening month and in each month after that for a year, based on your model for growth. Compare these projections with your projected business costs for the year. A viable markup strategy will cover your costs or come close to it. Businesses generally dont aim for making a profit in the first year, but settle on an acceptably low loss. Reconcile short-term losses with a long-term path to profitability with the financial reserves to sustain those losses until profitability comes, and your business should remain healthy.
Revisit your markups continually. Anything that isnt selling well compared to your expectations and your overall sales should be reduced in price, marketed more aggressively or replaced partially or entirely by another product.