Product Pricing Methods
What you’ll learn to do: Use various pricing methods to determine product pricing
We’ll go into a bit more depth on the math of a cost-oriented approach to retail pricing. First, we will learn more about the three components of retail pricing math: cost, markup percentage, and retail price. Additional components will then need to be considered in order to perform a break-even analysis, and we will explore the concepts of gross margin dollars and gross margin percent. Then we will break away from cost-oriented pricing methods and examine retail pricing based on competition and demand.
- Using cost-oriented pricing equations, calculate the retail price, the cost, and the markup percentage of a product
- Calculate the break-even point for retail product sales
- Explain how a retailer can use competition-oriented pricing to determine the price of a product
- Describe how retailers use demand-oriented pricing
Cost-Oriented Pricing Equations
We touched on this topic briefly in an earlier section when we calculated the markup of an item costing $4.00. We also discussed the concept of keystone pricing, which is simply a straight 50% markup on all items regardless of cost. We can easily calculate the different components of retail pricing using known variables.
To calculate the retail price based on cost requires knowing your markup objective. Markup, again, is the difference between what the retailer paid to a vendor for the product and the price at which they sell it to their customers. So for a target 53% markup on an item costing $9.00, we will need two steps. First, we need the “cost complement” of the markup which is calculated as:
Cost Complement = 100% − Markup
Cost Complement = 100% – 53%
Cost Complement = 47% or .47
Then we simply divide the cost of the product by the cost complement to arrive at the retail price.
Retail Price = $9.00 / .47
Retail Price = $19.15
To calculate markup percentage based on cost and retail price, we use the formula discussed earlier:
*Retail price minus cost price divided by retail price*
So if your item cost is $4.00 and you sell it for $10.00, you would calculate markup as:
($10.00 $4.00 = $6.00) /$10.00 = .6 or 60%
Finally, to calculate cost based on retail price and markup with a retail price of $25.00 and a markup of 55%, we would use this formula:
Cost = Retail price * Cost Complement
Cost = $25.00 * .45
Cost = $11.25