Many times there will posts on forums asking something like “how much should I mark up my products?” The extremely short answer is “it depends.” OK, you say. “what does it depend on?”
It depends on your product range, as some have different distribution channels and price levels than others. It depends on where you are along the channel and who you are selling to. It depends on how desperate you are to make a sale. And it depends on your true cost of the particular items in question.
So, let’s start there, with the cost. What is your true cost of the goods you are selling, excluding time and labor? Again, it depends. Did you buy it locally and pick it up? Was it delivered to you “for free?” Did you pay in-country shipping charges? Did you import the products yourself? If so you have overseas shipping, possibly a broker’s fees, possible storage charges at the docks, shipping from the port to your place of business and if you are buying by container loads, very possibly demurrage on the container.
Where ever you fit in the above, you add up all of the costs involved in your specific case and add them to the cost of the goods themselves. Then you do the math to compute your true cost per item. Accountants call this landed cost, and it is a figure you must know before working on any pricing scheme.
Depending on how you are planning to sell the products, other than direct retail to the end buyer, you have to keep in mind the margins others are going to expect. Retailers expect to double their cost, or a 50% gross profit. Some will settle for 40% and many will try for more than 50%, but in general 50% is the normal retailer profit, also called 100% markup.
Wholesalers are going to expect 30% and may settle for 20% if there is a lot of sales activity. So, let’s do a bit of math.
Your cost is 10, you want to make 20% yourself so you add 2.5 to the 10 for a total of 12.5, which is your price to the wholesaler. The wholesaler pays 12.5 and wants to make 30%, so he adds 5.37 to his cost, let’s call it 17.9 as his price to the retailer, who will double that price, rounding it to 34.99.
And you’re stuck with 2.5 out of a total markup of 25! What to do to improve your profit? If possible, buy for less. Negotiate a better deal, buy a larger quantity, maybe go into a larger purchase with someone you know and trust.
Or, and this may be easier, eliminate the wholesaler. Sell direct to the retailer. Sell at 15 and make 5, and encourage the retailer to sell at 29.99 and sell more, giving more profit to both of you. This alone Doubles your profit from 2.5 to 5!
Play with the prices. A trial a couple of years ago by a major department store found that dresses that were selling slowly for 34.95 did not sell any faster at 32.95 or even 29.95. But, catch this, when they went to 39.95 sales took off! This is a true situation. They continued up to 42.95 and 44.95 and ended up back at 39.95 as being the best “price point” for that style of dresses. They sold more at that price than at any other and the profits at the higher prices did not offset the slower sales to justify keeping the higher prices.
So, a term you hear from time to time comes into play – Perceived Value. It has nothing to do with your costs, it is simply what the average consumer feels the item is worth. In the case of the dresses above, the perceived value was 39.99.
When in the auto parts business I had a number of independent repair shops as wholesale customers. One in particular was the kind of family owned operation where people would leave their cars and tell them “I’ve got another, take your time and get it right.” So, the shop always had weeks of work waiting. (My parts delivery trucks always went to the first of the line.)
One night, sipping a beer with the son who was about to take over entirely, he asked what other shops were charging for hourly labor rates. I told him what I could and he said he was right there and had more work than he could handle. I told him to go up a couple of dollars at a time until things leveled out, than come back two.
He ended up raising his hourly rate eight dollars before he noticed and drop-off!
Four techs and he worked as well. Since they usually “beat the book” on hours there was about 60 hours per week times 5 guys time 6 dollars or a total of $1,800 per WEEK that he was leaving on the table.
He now closes the shop down for 2 weeks at Christmas, pays his employees full time and takes his family to Hawaii for those two weeks. Just from making sure he was collecting what the traffic would bear.
You need to do the same. Don’t simply sell at a price because it’s the thing to do. Play with your pricing, pushing the envelope. When you start to feel a push back, give in a bit and stand firm. Then, as the situation changes, try another push.
Guy, my shop owner friend is way above what we talked about 20 years ago, but he’s still the highest shop in the area and people still leave their cars until he can get to them.
It depends on your product range, as some have different distribution channels and price levels than others. It depends on where you are along the channel and who you are selling to. It depends on how desperate you are to make a sale. And it depends on your true cost of the particular items in question.
So, let’s start there, with the cost. What is your true cost of the goods you are selling, excluding time and labor? Again, it depends. Did you buy it locally and pick it up? Was it delivered to you “for free?” Did you pay in-country shipping charges? Did you import the products yourself? If so you have overseas shipping, possibly a broker’s fees, possible storage charges at the docks, shipping from the port to your place of business and if you are buying by container loads, very possibly demurrage on the container.
 |
| Small business secrets |
Depending on how you are planning to sell the products, other than direct retail to the end buyer, you have to keep in mind the margins others are going to expect. Retailers expect to double their cost, or a 50% gross profit. Some will settle for 40% and many will try for more than 50%, but in general 50% is the normal retailer profit, also called 100% markup.
Wholesalers are going to expect 30% and may settle for 20% if there is a lot of sales activity. So, let’s do a bit of math.
Your cost is 10, you want to make 20% yourself so you add 2.5 to the 10 for a total of 12.5, which is your price to the wholesaler. The wholesaler pays 12.5 and wants to make 30%, so he adds 5.37 to his cost, let’s call it 17.9 as his price to the retailer, who will double that price, rounding it to 34.99.
And you’re stuck with 2.5 out of a total markup of 25! What to do to improve your profit? If possible, buy for less. Negotiate a better deal, buy a larger quantity, maybe go into a larger purchase with someone you know and trust.
Or, and this may be easier, eliminate the wholesaler. Sell direct to the retailer. Sell at 15 and make 5, and encourage the retailer to sell at 29.99 and sell more, giving more profit to both of you. This alone Doubles your profit from 2.5 to 5!
 |
| Small business home business |
So, a term you hear from time to time comes into play – Perceived Value. It has nothing to do with your costs, it is simply what the average consumer feels the item is worth. In the case of the dresses above, the perceived value was 39.99.
When in the auto parts business I had a number of independent repair shops as wholesale customers. One in particular was the kind of family owned operation where people would leave their cars and tell them “I’ve got another, take your time and get it right.” So, the shop always had weeks of work waiting. (My parts delivery trucks always went to the first of the line.)
One night, sipping a beer with the son who was about to take over entirely, he asked what other shops were charging for hourly labor rates. I told him what I could and he said he was right there and had more work than he could handle. I told him to go up a couple of dollars at a time until things leveled out, than come back two.
He ended up raising his hourly rate eight dollars before he noticed and drop-off!
Four techs and he worked as well. Since they usually “beat the book” on hours there was about 60 hours per week times 5 guys time 6 dollars or a total of $1,800 per WEEK that he was leaving on the table.
 |
| smallb business growing |
You need to do the same. Don’t simply sell at a price because it’s the thing to do. Play with your pricing, pushing the envelope. When you start to feel a push back, give in a bit and stand firm. Then, as the situation changes, try another push.
Guy, my shop owner friend is way above what we talked about 20 years ago, but he’s still the highest shop in the area and people still leave their cars until he can get to them.
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