CHAPTER 2

Retail Pricing

bjectives
After 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 of

the consumer, and to the profitability of the business. For example, a buyer shops the
market and selects a group of picture frames to be sold for the next season, and a retail price of $30.00 is assigned to each frame. The process seems simple, but the results have far-reaching implications on the well being of the store and its entire retail
organization. With many items, the primary focus of the buyers decision making is
on the selection of the item based upon the style, color, size, and other features that
will be in demand by the consumer. Style and color are the first characteristics noticed
by the consumer when shopping for many items and are often the characteristics that
give the item appeal when displayed in the store. In the market, the buyer will view a
large variety of items with many characteristics. Selecting the right items for the stores
target consumer is one of the keys to success in retail.
Determining which item will sell is a challenge for all who must forecast and buy
for retail sales. Yet, the price of the item is equally important. The right item at the
wrong price will not sell. Although assigning a retail price seems simple, it is as challenging as determining the right item. Pricing decisions involve three retail price elements: retail price, wholesale cost, and markup. Determining the right price includes a
variety of activities: (a) understanding the retail price elements, (b) identifying the
types of markup, (c) establishing a basis or method for all pricing decisions, and (d) examining factors affecting the three price elements.
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.

13

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Retail Price Elements

The retail price must contain the wholesale cost of the item and the markup assigned to the item. The wholesale cost of the item is generally called cost of
goods or cost, a generic term that will be used regardless of the type of item that
is purchased. In retailing, cost of goods is always used to refer to the wholesale
cost. 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 the
item. Cost of goods includes the invoice value of the item, which is also called
the list price, the transportation, and often the cost of insurance to cover the
merchandise 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 retail
price and the cost of goods sold. As will be mentioned in the methods of pricing
section, the markup may be established by one of several methods, for example,
component addition, price lining, and market pricing. With the component addition method, markup is built from the value of needed expenses. In price lining
and market pricing, markup is the result of the difference between cost and the
established retail price. Markup may be set as a single amount for every item, regardless of type or classification of merchandise; however, a fixed or single
markup is usually used only with like or similar items within a merchandise classification. Markup may also be fixed as equal to the cost of the merchandise. This
method is known as a keystone markup or a markup that doubles the invoiced
cost of the item to achieve the retail price. Alternatively, markup may vary across
the same classifications and/or other merchandise categories. Markup, within one
store, may be different for many items. Markup may also change for an item as
the season and the level of sales change or during price adjustments such as markdowns, special promotions, or other price changes. Many methods are used to
find markup, but the formula, which represents the relationship among the price
elements, is the same in each situation. The formula for retail dollars is
Retail $ = Cost $ + Markup $
Through algebraic changes, the retail dollars formula can be rewritten to solve for
markup dollars and for cost dollars. The formula for markup dollars is
Markup $ = Retail $ - Cost $
In addition, the formula for cost dollars is
Cost $ = Retail $ - Markup $
If any two of the three retail elements (i.e., retail dollars, cost dollars, or markup dollars) are given, the other element can be identified. This situation of knowing only
two of the three price elements could occur when the buyer wanted to have new merchandise at the same retail price as some previous merchandise. The buyer would
know the needed markup and the retail price, and would need to determine what was
the right cost for the new merchandise.

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RETAIL PRICING

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?
Retail $ = Cost $ + Markup $
(Hint: Insert the values for cost and markup from the preceding situation.)
Retail $ = $15.00 + $15.00
Retail $ = $30.00
Problem 2

The same buyer purchased a group of candles at a cost of $13.50 per candle for a suggested retail price of $29.99 per candle. What is the necessary markup for one candle?
Retail $ = Cost $ + Markup $
(Hint: Through algebraic changes, formula can be rewritten to solve for
markup $.)
Markup $ = Retail $ - Cost $
(Hint: Insert the values for cost and markup from the preceding situation.)
Markup $ = $29.99 - $13.50
Markup $ = $16.49
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.)
Retail $ = Cost $ + Markup $
Retail $ = $50.00 + $50.00
Retail $ = $100.00
Problem 4

Hoping to build multiple sales opportunities, another buyer for the same retail store
purchased casual pants to coordinate with the shirts in Problem 1. The pants were retailed with a keystone markup on $48.00. What is the cost of each pair of pants?
Cost $ = Retail $ - Markup $
(Hint: Keystone is doubling the invoiced cost of the item. In this situation, calculate markup $ by finding one/half or 50% of the retail price.)
Cost $ = $48.00 - $24.00
Cost $ = $24.00
The retail price elements can also be viewed as percentages. Percentages are useful for
making comparisons across items, across departments, and across stores. The retail price is
the base of the relationship and represents 100% of the price. Using the retail price as a

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CHAPTER 2

base is common for many retailers. The cost of goods can be used as a base, but this pricing situation is more common in manufacturing companies than for retailing companies.
Traditionally, fashion goods manufacturers have focused their pricing methods on the
component addition method because the cost of labor is an extremely important element
in determining the overall cost of the item. For the work in this text, the percentages are
expressed at two decimal places. This format is equivalent with the two decimals used for
all dollar amounts. The formula for retail price percentages is
Retail % = Cost % + Markup %

Sample Problems: Retail Price Elements as Percentages

Problem 1

A small picture frame is assigned the markup percentage of 45.30%, and the cost percentage is 54.70%. By applying the formula, a retail percentage of 100.00% can be confirmed.
Retail % = Cost % + Markup %
(Hint: Insert the percentages from the aforementioned situation into the
formula.)
Retail % = 54.70% + 45.30%
Retail % = 100.00%
(Hint: By adding cost percentage and markup percentage, the retail percentage
of 100% is confirmed.)
Problem 2

A sofa pillow with ruffles has a cost percentage of 38.80%. The retail percentage is
known to be 100.00%. What is the markup percentage for this product?
Retail % = Cost % + Markup %
(Hint: Using algebraic rules for solving equations, the percentage formula
can be rewritten to solve for markup percentage. In this situation, Cost % is
subtracted from both sides, and Cost % - Cost % results in a zero.)
Retail % - Cost % = (Cost % - Cost %) + Markup %
(Hint: The resulting formula solves for Markup %. Further uses of this
type of algebraic manipulation will not be discussed.)
Markup % = Retail % - Cost %
(Hint: The percentages from Problem 2 can be inserted into the formula.)
Markup % = 100.00% - 38.80%
Markup % = 61.20%
Problem 3

The standard markup percentage for the store is 45.50%. An umbrella is sold in the
store at $50.00. What is the cost percentage of the umbrella?
(Hint: Retail percentage is 100%.)
Retail % = Cost % + Markup %
(Hint: Using algebraic rules, the formula can be rewritten to solve for
cost percentage.)

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RETAIL PRICING

Cost % = Retail % - Markup %

(Hint: Percentages from Problem 3 can be inserted into the formula.)
Cost % = 100.00% - 45.50%
Cost % = 54.50%
In many situations for a company, the buyers, managers, and top administration
will use both dollar amounts and percentages for the retail price elements in their
study 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 price
elements, and markup and cost percentages are rates. With this relationship, retail
prices, costs, and markups can be calculated from (a) industry standards or (b) percentages established by company policy.
Percentages are also used to make comparisons of cost and markups that are
determined from different retail price bases. Consider the following example: The
markup on a $48.00 dust ruffle is $21.00 and the markup on an $8.00 face cloth
is $5.00. The dust ruffle appears to have the higher markup when comparing the
markup dollar amounts, but if the percentages of markup are compared, the face
cloth may have a higher, lower, or similar markup. The formula for calculating
markup percentage (based on retail) when markup dollars and retail dollars are
given is
Markup % = Markup $>Retail $ * 100
The formula for calculating cost percentage (based on retail) when wholesale cost and
retail price are given is
Cost % = Cost $>Retail $ * 100
Sample Problems: Retail Price Elements as Percentages
Problem 1

Calculate the markup percentage on the dust ruffle with a markup of $21.00 and a
retail price of $48.00.
Markup % = Markup $>Retail $ * 100
Markup % = $21.00>$48.00 * 100
(Hint: In the application of another algebraic rule, the result of the ratio division must be multiplied by 100 to convert the decimal result to a percentage.)
Markup % = 43.75%
Problem 2

Calculate the markup percentage on the face cloth with a markup of $5.00 and a
retail price of $8.00.
Markup % = Markup $>Retail $ * 100
Markup % = $5.00>$8.00 * 100
Markup % = 62.50%
Which item, the face cloth or the dust ruffle, had the higher markup percentage?
Ans: The face cloth!

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Problem 3

A home furnishings buyer purchased a coverlet for $55.00 (at cost) and plans to retail
it 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.)
Markup $ = Retail $ - Cost $
Markup $ = $125.00 - $55.00
Markup $ = $70.00
(Hint: The markup percentage can be calculated with the markup percentage formula.)
Markup % = Markup $>Retail $ * 100
Markup % = $70.00>$125.00 * 100
Markup % = 56.00%
Problem 4

The cost of a blue vase is $12.00. The vase retails for $50.00. What is the cost
percentage?
Cost % = Cost $>Retail $ * 100
Cost % = $12.00>$50.00 * 100
Cost % = 24.00%

Frequently the buyer or merchandise planner will have a mixture of pricing information about a product. For example, the merchandise planner will know the anticipated retail price and will need to determine the potential markup dollars or cost
percentage. The buyer may know the cost in dollar and the markup percentage and
will need to determine the retail price. Although these combinations of variables in
the retail price relationship can be confusing, the buyer or planner will be following
a generic or basic format with each of these calculations. The basic format can be expressed with the base dollars always being the retail price and the rate being any percentage, for example, markup percentage or cost percentage. The results dollars from
these calculations will be in correspondence to the rate. If the rate is markup percentage, the results are markup dollars. If the rate is cost percentage, the results are cost
dollars. 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 dollars
and percentages is
Results $ = Base $ * Rate %
By inserting the terms for the price elements and through algebraic manipulation, the formula can be rewritten to solve for each retail element. The price relationship formula to find cost dollars and percentage is
Cost $ = Retail $ * Cost %
The price relationship formula to find markup dollars and percentage is
Markup $ = Retail $ * Markup %

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Spreadsheets
The relationships among the three price elements can be best expressed in a spreadsheettype format. Spreadsheets, written by hand or developed on a computer, are used by
many companies to display financial information. Software for spreadsheet programs
(e.g., Excel, dBase, Quattro Pro, and Lotus) is available for most computers. Although
each program has some unique features, most of their basic operations are similar. Some
retail companies may have their own proprietary software with computer programs
written especially for that company, but regardless of how sophisticated a companys
spreadsheet 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 percentages are shown in the columns.
A spreadsheet for the dollars and percentages of the pricing elements could appear as the spreadsheet in Figure 2.1. This spreadsheet can be used for expressing the
price relationship and calculating changes to that relationship.
Figure 2.1

Elements

Dollars $

Percentages %

Retail

Spreadsheet for
the Pricing Elements.

- Cost
= Markup

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 determine the additional information needed. The use of a computer spreadsheet allows
the decision maker to enter alternative values and rapidly make changes based on the
results. Furthermore, information can be added to the spreadsheet over time, and adjustments can be made when prices change. The use of the spreadsheet also provides a
ready 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 dollars for the tie? To use the spreadsheet format, follow these three steps:
Step 1. Write the spreadsheet format.
Elements

Dollars $

Retail
- Cost
= Markup

Step 2. Insert the known values from the problem.

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

Percentages %

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Elements
Retail

Dollars $

Percentages %

$18.50

100.00%

- Cost
= Markup

38.80%

Step 3. Use the relationship formula to solve for the unknown values.
Markup $ = Retail $ * Markup %
Markup $ = $18.50 * 38.80%
Markup $ = $7.18
Elements
Retail

Dollars $

Percentages %

$18.50

100.00%

$7.18

38.80%

- Cost
= Markup

The relationship of dollars and percentages is very specific. When the retail
dollars are known, markup percentage can be used to find markup dollars, and cost
percentage can be used to find cost dollars. In the previous problem, markup dollars
and markup percentages are now known, and retail dollars and percentages are
known. To complete the spreadsheet and find the values for cost, additional calculations using the retail dollar formula, the retail percentage formula, and the relationship 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 cost
percentage?
Elements
Retail

Dollars $

Percentages %

$18.50

100.00%

$7.18

38.80%

- Cost
= Markup

The following steps are used to solve this problem:

Step 1. Use the retail percentage formula.
Retail % = Cost % + Markup %
(Hint: Rewritten, this formula can be used to solve for cost percentage.)
Cost % = Retail % - Markup %
Cost % = 100.00% - 38.80%
Cost % = 61.20%
Enter the value into the spreadsheet.

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RETAIL PRICING

Elements

Dollars $

Percentages %

$18.50

100.00%

Retail
- Cost

61.20%

= Markup

$7.18

38.80%

Step 2. Use the relationship formula.

Cost $ = Retail $ * Cost %
Cost $ = $18.50 * 61.20%
Cost $ = $11.32
Enter the value into the spreadsheet.
Elements

Dollars $

Percentages %

$18.50

100.00%

$11.32

61.20%

$7.18

38.80%

Retail
- Cost
= Markup

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

Retail $ = Cost $ + Markup $
Retail $ = $11.32 + $7.18
Retail $ = $18.50
(Hint: Small difference in value may appear due to rounding dollar amounts
and percentages.)
The spreadsheet format may be used to calculate any of the missing values in the
pricing relationship. For example, the buyer may have a preset markup (markup percentage) and a price point (retail dollars) that must be achieved. Before shopping for
an item, the buyer must know the maximum cost that the item can have. The following 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 the
maximum cost in dollars that the buyer may pay for the box, and what is the markup
dollar value?
Step 1. Use the spreadsheet format.
Elements

Dollars $

Retail
- Cost
= Markup

Step 2. Enter the values from the problem.

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

Percentages %

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CHAPTER 2

Elements
Retail

Dollars $

Percentages %

$48.50

100.00%

- Cost
= Markup

68.50%

Step 3. Find the percentage associated with the cost.

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

Dollars $

Percentages %

$48.50

100.00%

- Cost

31.50%

= Markup

68.50%

Step 4. Use the relationship formula.

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

Dollars $

Percentages %

$48.50

100.00%

$15.28

31.50%

= Markup

68.50%

Step 5. Find the value of the remaining cell.

Retail $ =
Markup $
Markup $
Markup $
Elements

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

Percentages %

$48.50

100.00%

- Cost

$15.28

31.50%

= Markup

$33.22

68.50%

Retail

Using the same spreadsheet format, a retail buyer can also calculate retail dollars
on specific items to reach a planned markup percentage goal. This goal is usually established 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 calculating buying plans and attending markets.

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RETAIL PRICING

The retail dollar formula, when cost dollars and needed markup percentage are
known, is
Retail $ = Cost $>Cost %
or
Retail $ = Cost $>(100.00% - Markup %)
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.
Elements

Dollars $

Percentages %

Retail
- Cost
= Markup

Step 2. Insert the known values from the problem.

Markup % = 56.00%
Cost $ = $75.00
(Remember: Retail % = 100%.)
Elements

Dollars $

Percentages %

Retail
- Cost

100.00%
$75.00

= Markup

56.00%

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

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

Dollars $

Percentages %

Retail
- Cost

100.00%
$75.00

= Markup

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

Cost $ = Retail $ * Cost %
Retail $ = Cost $>Cost % (Manipulate with algebra.)
Retail $ = $75.00>44.00%
Retail $ = $170.45

44.00%
56.00%

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CHAPTER 2

Elements

Dollars $

Percentages %

Retail

$170.45

100.00%

$75.00

44.00%

- Cost
= Markup

56.00%

(Note: Many retailers would round or adjust the retail price to either $170.00 or $171.00
to bring the retail price within the desired price line.)
Step 5. Calculate the value of markup dollars (the remaining cell).
Markup $ = Retail $ - Cost $
Markup $ = $170.45 - $75.00
Markup $ = $95.45
Elements

Dollars $

Percentages %

Retail

$170.45

100.00%

- Cost

$75.00

44.00%

= Markup

$95.45

56.00%

With any method of price setting, the target consumer must be kept in mind because the objective of retailing is satisfying the target consumer. The retail price, regardless of how it is established, must seem appropriate to the consumer. While shopping, the
consumer will observe an item and look at the price. The two factors, appearance (especially color) and price, must seem logical to the consumer. If the price is judged too high
for the item, the consumer may refuse to buy. Some consumers may decide to wait for
the item to be marked down, select a similar but lower cost item, or leave the store without making any purchases. Any of these three scenarios will result in less sales for the
company. If the consumer judges that the price is too low, the consumer may question if
the quality of the item is different from what is expected, if the item is mislabeled, or if
the item has a hidden defect. For brand name products, the prestige of a brand can be
damaged in the consumers mind if the price seems to be too low or too high. Getting the
consumer to perceive the price as right for the quality or value of the item is a very risky
but vitally important retail decision.

Types of Markup
Markup, 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 situations
for each markup. Individual markup is the markup found on one item or one stockkeeping unit (SKU). For example, a pair of bookends has a retail price of $20.00 and
a cost of $8.00; therefore, this item has a dollar markup of $12.00. The $12.00 represents an individual markup. When multiple units are considered together, the markup
is a gross markup. If 15 pairs of bookends have individual markups of $12.00, the
gross markup for the lot of bookends is $180.00. A gross markup may be calculated
for multiple units in lots of merchandise, for an entire department, for all merchandise 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 $

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RETAIL PRICING

If the markup on each item is the same, the formula can be expressed as
Gross Markup $ = Markup $ per Unit * # of Units
Sample Problem: Gross Markup

A store sells 22 coffee makers from the houseware section. Each coffee maker was
from a well-known national brand and had a markup of $24.80. What is the Gross
Markup dollars for the 22 appliances?
Gross Markup $ = Markup $ per Unit * # of Units
Gross Markup $ = $24.80 * 22
Gross Markup $ = $545.60
Most of the time, identical or similar items within a specific classification, such as
brand name appliances, differ in cost when purchased at wholesale from each manufacturer or vendor. Sometimes private label merchandise has a lower wholesale cost and
can have a higher markup than branded merchandise of the same or similar classification. 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 are
purchased on one order form. Additionally, within any given store or department, numerous orders can be found with varying wholesale costs and various retail prices.
In each of these instances with multiple but diverse units within one purchase
by the buyer, the retailer cannot calculate a single gross markup percentage by averaging markup percentages on individual items. Markup percentages can only be averaged when quantities are the same for every item or SKU. Markup percentage on
individual items with varying costs and retail prices will differ from the markup percentage on the total group of items.
The next problem illustrates a method for determining markup percentage on a
group of items with varying costs or retail prices.
Step 1.
Step 2.
Step 3.
Step 4.
Step 5.
Step 6.

Calculate the retail price for each of the items

Calculate total retail of all items
Calculate total cost of all items
Calculate the overall total cost and overall total retail
Calculate total markup dollars
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 item
will be retailed at a keystone markup plus $5.00. What is the gross markup dollars for
the order? What is the markup percentage for the order?
Order Form for the Costume Jewelry Department

Item

Quantity

Wholesale Cost

Earrings

25

$15.00

Necklaces

15

$25.00

Pins

20

$18.50

Overall Total

Total Cost

Retail Price

Total Retail

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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.)
Earrings

$15.00 * 2 (keystone)

= $30.00 + $5.00 = $35.00

Necklaces

$25.00 * 2

= $50.00 + $5.00 = $55.00

Pins

$18.50 * 2

= $37.00 + $5.00 = $42.00

Step 2. Insert costs, number of units, and retail price into order form.
Order Form for the Costume Jewelry Department

Item

Quantity

Wholesale Cost

Total Cost

Retail Price

Earrings

25

$15.00

$35.00

Necklaces

15

$25.00

$55.00

Pins

20

$18.50

$42.00

Total Retail

Overall Total

Step 3. Calculate the total retail dollars and insert the values into the spreadsheet.
Total Retail $ = # of Units * Retail $ per Unit
Earrings
25 * $35.00 = $875.00
Necklaces

15 * $55.00 = $825.00

Pins

20 * $42.00 = $840.00

(Note: When these calculations are done on a computer, the formula can be
entered to multiply one cell [quantity] times another cell [retail price].)
Order Form for the Costume Jewelry Department

Item

Quantity

Wholesale Cost

Total Cost

Retail Price

Total Retail

Earrings

25

$15.00

$35.00

$875.00

Necklaces

15

$25.00

$55.00

$825.00

Pins

20

$18.50

$42.00

$840.00

Overall Total

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

Order Form for the Costume Jewelry Department

Item

Quantity

Wholesale Cost

Total Cost

Retail Price

Total Retail

Earrings

25

$15.00

$375.00

$35.00

$875.00

Necklaces

15

$25.00

$375.00

$55.00

$825.00

Pins

20

$18.50

$370.00

$42.00

$840.00

Overall Total

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RETAIL PRICING

Step 5. Calculate the overall total cost and overall total retail.
(Hint: Sum the total cost and the total retail columns.)
Order Form for the Costume Jewelry Department

Item

Quantity

Wholesale Cost

Earrings

25

$15.00

$375.00

$35.00

$875.00

Necklaces

15

$25.00

$375.00

$55.00

$825.00

Pins

20

$18.50

$370.00

$42.00

$840.00

Overall Total

Total Cost

Retail Price

$1,120.00

Total Retail

$2,540.00

Step 6. Calculate the total markup dollars.

Total Markup $ = Total Retail $ - Total Cost $
Total Markup $ = $2,540.00 - $1,120.00
Total Markup $ = $1,420.00
Step 7. Calculate the total markup percentage.
Total Markup % = Total Markup $>Total Retail $ * 100
Total Markup % = $1,420.00>$2,540.00 * 100
Total Markup % = 55.91%
(Note: If the buyer were trying to achieve a markup percentage goal of 55%, the
goal would be achieved on this order.)
Closely related to gross markup is initial markup, which is calculated using
the initial or first retail price of all items at a point in time. This markup is based
on gross sales and is used at the beginning of a selling period. Gross sales are all potential retail sales based on the initial retail prices. This initial markup covers adjustments for planned markdowns and other reductions that may occur later in the
selling period. When an initial markup is based on actual retail sales for a period
and not on initial retail prices, the markup is called a gross margin. Actual retail
sales are also called net sales because gross sales have been adjusted for markdowns
and for other losses.
The formula for calculating gross margin dollars is
Gross Margin $ = Net Sales $ - Cost of Goods Sold $
For a successful retail business, gross margin must be large enough to include the
value of operating expenses, profits, and taxes.
Maintained markup is used to calculate the markups that can be achieved after
adjusting for the charges of servicing the fashion goods. These charges can include alteration expenses and cash discounts. Cumulative or average markups are calculated
for a group of items with different markups at a point in time. Cumulative markup is
calculated after the beginning of each major delivery period or selling period. In this
case, the cumulative markup includes the markup on the beginning inventory, which
is usually at retail dollars and is based on book value of the inventory or actual physical inventory calculations. Cumulative markup is the difference between the total cost
of purchases and total retail dollars of all merchandise in stock during a given time

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period. This markup is used to calculate a final markup when markups have changed
over time. Gross, initial, maintained, and cumulative/average markups will be discussed in later chapters.

Methods for Pricing Decisions

The method used to determine price may be based on company policy, the judgment
of top management, the classification of the merchandise, or the type of store in which
the merchandise is being sold. For example, fashion goods usually have a higher
markup than basic goods. National brands are sold at relatively the same retail price by
most retailers within a particular geographic area, because the wholesale and transportation costs for the items are usually the same or very comparable for all of these retailers. Private label merchandise may be priced to help the retailer achieve a higher
markup to compensate for markdowns, slow-selling merchandise, or poor selections
from incorrect buying decisions. Private label merchandise may also be priced to reflect
the best quality at the best available price for a specific product classification. In this
case, the retail price is probably based on the firms policy to utilize its private brand
merchandise to build store traffic and store image and to maintain a substantial target
customer base. Certain types or classifications of merchandise have a higher risk of theft
and 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 reasons, 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 should
have knowledge of the methods and the characteristics of the methods. Retail pricing
methods include component addition, past records, price points, or market value.
Component addition builds the price of each item in the inventory from the cost
of the item and the needed markup. This method is often used when a retailer is opening
a 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, categories of merchandise, or departments are contributing their appropriate share of markup
to the business. With component addition, the decision maker, the buyer or manager, examines what expenses must be covered by the retail price. A portion of the retail price for
each item sold in the store must contribute to the income needed to cover the overall expenses of the store and to provide enough income for the desired profit. The retail price
must 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 of
thumb type calculation. For some stores, the markup is an automatic 50% of retail
price. This 50% markup is called a keystone markup (as described earlier). Using a
keystone markup, the cost of the item would be doubled to yield the retail price. In
reality, keystone markup is rarely used for all items in the store. Even when the keystone 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 of
merchandise 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 designed for promotional sales or as attention getters. When these items are sold at
wholesale cost or below, they are called loss leaders. This pricing is designed to bring
consumers into the store. Some retailers believe that loss leaders create a larger sales
volume and entice consumers, once they are in the store, to buy higher priced items

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29

that may have higher markups. With this technique, both markup and sales volume
are maintained or boosted. Other retailers are concerned that loss leaders can damage
the high fashion image of a store because price is often used by the consumer to evaluate the fashion or quality level of a store or item.
Past records, for a store with a sales history, provide a record of accomplishment for
the sale of similar items. These records will include retail prices, numbers of items sold at
the price, and adjustments that were made to the price throughout the season. Records
will also indicate the number of unsold items. In the past records method, the historical
retail records are used as a starting point for establishing current retail prices. The actual
price must be adjusted for environment, market, product changes, inflation, competition, and style features. A pricing decision on current items is always somewhat different
from any previous sale of a similar or even identical item. If a $30.00 shirt from one year
is carried in the store the next year, the retail price may be adjusted upward to include
dollars 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 hopes
of 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 cycle
must be analyzed before establishing a new retail price. New items just appearing in
the store and considered fashion forward can carry a higher retail price than items that
have 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 product life cycle and demand for them may be diminishing.) The retailer must also consider whether a customer can recognize the item as part of last years line. This
recognition will diminish the retailers image of being fashion forward.
Adjustments that are made to the past retail price are often made by estimations
and overall merchandising judgment. Scientific or statistical data may not be available
or simply not considered when setting new retail prices. Regardless of the method
used, past records are always helpful as a point of comparison; however, the decision
maker must remember that past records are not always indications of future sales and
that 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 are
used by department stores and other stores with a wide variety of fashion goods to
help the consumer discriminate among the similar items. The levels of price points are
set at low, moderate, and high. Within one store, shirts may sell at each of three separate price points. These price points are established by starting with a price floor and
subsequently increasing the price of similar, but more costly goods to higher and distinctly different price points. Fashion goods sold at separate price points must appear
significantly different to the consumer. The styles of three price point shirts may be
similar, but details will vary. A shirt at the lowest price point may have a fiber content
of 50% polyester and 50% cotton with limited trim and plastic buttons. A shirt at the
middle price point may be 100% cotton. The shirt at the top price point would be of
100% pima cotton and have eyelet trim with fabric-covered buttons.
Most department stores would house these shirts in separate departments based
upon demographics, psychographics, lifestyles, and physical characteristics of the target consumer. In addition, the fashion awareness level of the consumer as well as the
stage in which the merchandise falls on the fashion curve would be considered. Based
upon fashion detailing, price, and size, the pima cotton shirt would probably be
found in a Designer, Bridge, or Contemporary Department. The 100% cotton,
middle price point, shirt would then be put in the Better Department, and the
cotton/polyester blend shirt would be in the Moderate Sportswear Department. Price
points for such items and other items in the store may be established at the corporate
level for multiunit stores. This method is useful for stores that maintain a standardized image across store units.

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Market pricing is often used for popular fashion goods and new items, or in highly competitive markets. The retail price is established by estimating the price desired by
the target market. The question that retailers pose is what will the market bear? The
retailer must determine what is the highest possible price that can be placed on an item
and still have that item be attractive and buyable by the consumer. If the price is too
high, the consumer will not purchase the item even if it is highly desirable from a fashion perspective. Knowing what is too high is a difficult process and requires market research, in-depth knowledge of the target consumer, and an excellent fashion sense by the
retailer or buyer. On very new items, the retail price may be higher than the price will be
later in the season because the item is projected to be very popular. In such a case, the
consumer is expected to pay extra for the privilege of buying this item early in the season. Exclusive and unique fashion goods may also be priced higher than the more basic
merchandise because the popularity of these items is subject to rapid change and the
items are at risk for higher than usual markdowns later in the season. Overall, market
priced items may have an average markup that is similar to the store average because of
the high initial markup where some merchandise is sold and the lower final markup
when the remaining merchandise is sold. The task of the retailer is to select a market
price that will maximize the target market demand early in the selling season and leave
very limited amounts of merchandise for drastic markdowns late in the season.
A higher markup on these trendy items also helps to offset the higher promotional and advertising costs needed to sell the more fashion forward merchandise.
This method also requires a review of the companys marketing strategies. Market
pricing may also be set by evaluating the prices of the competition. The retail price
may be set higher, lower, or the same as the prices for similar items in the competitors
store. This decision is made relative to the strategic plan of the retailer and the positioning of the business. (See Chapter 5.) Determining markdowns and other aspects
of pricing strategies are discussed in later chapters.
Determining the exact retail price for an item is an important step in selling
merchandise. The retail price of an item affects its salability, the stores image, and the
overall profitability of the store. The retail price of an item must be established before
the merchandise is placed in the store, which further adds to the risky and speculative
nature of the pricing decision. Although past records, current pricing policies, market
conditions, expenses, and other factors are considered, the final decision in establishing a retail price must depend on the judgment of a person. Underlying all the previously described pricing methods is the need for the buyer or merchandiser who sets
prices to possess knowledge of the item, the store, the market, and the consumer.

Factors Affecting the Three Price Elements

Retail price, cost of goods, and markup are affected by numerous factors in the business world. These retail price elements are interrelated; therefore, an adjustment in
one 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 results. 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 a
corresponding rise to maintain the overall value. In periods of inflation, the rise in
cost of goods is common as the manufacturer passes the increased costs of manufacturing 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

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31

the retail price of the item outside of the intended price line or higher than the price
of similar items at the competitors stores.
For example, a brand name basketball with a $30.00 retail price, last season, had a
wholesale 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 season, the ball has a new retail price of $34.00. If other brands of balls selling for $30.00
did not have a cost increase in the market, this ball may now be above the price point
range for similar items. The buyer may wish to keep the brand name ball in the group of
balls and must consider numerous factors before selecting a new retail price. The buyer
has 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 consumer
will not be disturbed by a $4.00 price difference among similar items.
In competitive markets and periods of economic tension, consumers may not
be willing to accept price increases. If the retail price must remain constant, either of
the remaining price elements or both elements must experience a drop. For instance,
consumers of apparel are becoming more demanding about price. Many consumers
will not buy if the price is perceived as too high. As retailers review their pricing decisions, many buyers have had to seek lower priced merchandise. The lower priced merchandise may assist the retailer in achieving the desired retail price, but the lower
priced merchandise may have a lower quality than previous items. The consumer is
becoming more educated and may notice the drop in quality. This action can negatively affect the overall image of the store as well as the sales volume and profit. An alternative to changing merchandise is to lower markups. A lower markup can be
achieved with lowering operating expenses or reducing profit.
An alternative action is to buy off-price, first quality merchandise up front or at
the 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 merchandise 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 retailer
is based upon the dollar or unit amount of the initial season order that is placed at regular price. The off-price merchandise is usually offered to the retailer at 20% to 30% off
the 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 or
may not be delivered to the retailer at the same time as the initial order. Regardless of
the time for shipping, the off-price goods can be retailed at the same retail price as the
initial order, and the retailer will have a higher initial markup on this group of merchandise. The retailer can use the higher markup to offset the drop in sales volume created 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 a
drop in the overall sales volume. When retail prices rise, consumers tend to buy fewer
items than when prices remain stable. If the store could sell 10 items at $30.00, the
total sales would be $300.00, and the total markup may be $150.00. If the rise in cost
of goods, as described previously, creates a new retail price of $34.00, the store may
sell only seven items. The total sales would be $238. If the markup dollars per item
remained 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 the
overall sales for the store. A drop in the sales volume can result in a drop in gross margin. 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. The
large discount stores use the method of many small markups. They depend on high volume of sales for many, small, individual markups. The small stores or individual boutiques
have higher individual markups, but have fewer sales. In a competitive market, the middle

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position of moderate markups with moderate number of sales is a difficult position for
success. A clear store image and selection of desired merchandise is hard to maintain with
this price structure. Department stores have used this moderate price structure and have
found 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 levels
of service than items with lower retail prices. Consumers expect an upscale, highfashion store to have high prices; new, expensive furnishings; and plenty of skilled
sales associates. Most importantly, service in retail is directly associated with the number and qualifications of the sales associates. To provide excellent customer service,
sales associates must be selected carefully and trained continually. Qualified sales associates will require higher wages than unqualified staff. Training requires both time and
money. To maintain high levels of service, the markups on items must be large
enough to cover these operating expenses.
Higher priced goods are also associated in the consumers mind with higher
quality goods. Fashion items that have and maintain high quality are usually higher
cost 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 be
deep 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, the
manufacturer might use pewter on a trim instead of plastic.) Improved quality can
also be achieved with new designs, improved fit or size, and improved construction.
All of these factors are achieved by the manufacturer with increased costs. Higher
priced 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 on
higher prices for these quality features.
In addition, high priced goods require a more expensive store image. Consumers equate high prices with evidence of luxury. Luxury in retail image can be
achieved through new and exciting signs, fixtures, lights, and other store features. For
example, the size and decor of the dressing room can convey an image to the consumer. A large dressing room with soft lighting and nice furniture tells the consumer
that this is an upscale store with high quality merchandise. To achieve and maintain
such a retail image, markups and other adjustments must be large enough to cover the
inflated operating expenses and costs.

ummary
Establishing the retail price of an item is a very important decision. The three price elements of retail price, cost, and markup must be examined. Retail price is the initial
price of an item in the store. Cost of goods is the wholesale price of an item. Markup
can vary from individual markup to gross margin and is used to cover the operating
expenses and profits needed for a store. These three elements can be expressed in dollars and percentages and can be calculated based on their relationships. However, an
appropriate retail price is more than just a mathematical calculation. The retail price
affects the store image and the purchasing behavior of the consumer. A retail price
that is too high can reduce overall revenues. A retail price that is too low can rob the
store 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 consumer and make a profit for the store. Merchandising judgment, along with mathematical ability, is needed to establish the optimum retail price that will be at a level
appropriate for the target consumer, the store, the merchandise, and the marketplace.

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Key Terms
Activity-based accounting
Average markup
Component addition
Competitive markets
Cost
Cost of goods
Cumulative markup
Gross margin
Gross markup

Higher priced goods

Individual markup
Initial markup
Keystone markup
Loss leaders
Maintained markup
Market pricing
Markup
Net sales

Past records
Past records method
Periods of inflation
Price lines
Price points
Retail price elements
Retail price relationship
Sales volume
Spreadsheet

Discussion Questions
1.
2.
3.
4.

What are the three price elements?

Why does a store need markup?
Who determines the cost of an item?
Why is setting the retail price an important consideration 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 price

for a new fashion item?
8. What information is needed to determine the best
retail price for an item?
9. If the cost of an item has an increase, what will
happen to the retail price? Why?
10. Why do small stores have higher markups than
large discount stores?

Exercises
Price Elements
1. 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 retail
price?
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 the
cost percent?
5. A wallet item retails for $22.68. What is the cost of the item when the cost percent is 53.00%?
6. The newest vase in the store has a retail price of $56.98. The markup percent for
the 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 the
markup dollars?
8. A pair of gloves has a retail price of $34.50. The standard markup on gloves is
52.50%. What is the cost of the gloves?
9. A set of dishes costs $29.50, and the standard store markup is 45.50%. What will
be the retail price of the dishes?

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10. A pair of boots had a cost of $89.00 and cost percent of 42.50%. What is the
retail 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 one
pair of socks?
12. The buyer finds a line of picture frames at the cost of $12.74 per frame. The
buyer thinks that the frames can be retailed for $45.00. What should be the expected 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 $8.50
and 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 retail
price of one toy is set at $7.55. What is the markup percent?

Individual Markup to Gross Markup

1. 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 sales
potential for the department?
4. What is markup percent (gross markup percent) for the handbag department in
Problem 2?
5. A retail store sells every item for $6.00. Last year, the store had retail sales for the
year 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 buyer
spends $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 to
sell 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 for
the 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 the
department if 160 striped ties are sold?
10. Which group of ties (the ties in Problem 8 or 9) has the potential for a greater
gross markup for the store? Why?

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

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You should have one file for all problems. Just scroll down to the rows below the
first 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 problems on one page, but you should not split a problem across two pages.
$
Retail

%
100.00%

- Cost
= Markup

Price Elements
1. 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 cost
percent for the blanket? What are the markup dollars and the markup percentage
for the blanket?
3. What are markup and cost percentages for shorts that cost $255.00 a dozen and
retail for $34.60 each?
4. For a special sale, the buyer got 10 dozen pairs of socks for $224.50. Markup for
the 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 regular
markup on a bag for the department is 43.50%. What is the maximum cost that
the buyer may pay for one bag?
6. A set of sheets is found in the market at $45.00 a set. Using market pricing, the
buyer thinks that these sheets may retail for $70.00. What is the maximum
markup percentage that this pricing will achieve?
7. Gold jewelry is very popular with a stores customers. The buyer wants to get a
higher 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 with
the 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 color
and wants to sell these at a higher price point than the mats in current colors. Use
changes in markup percents to show how two separate price points can be used
with one cost.
9. The standard retail price of dress boots is $250.00 for a shoe department. The
buyer needs to get a markup percent of 43.50%. What is the cost the buyer can
pay to achieve this markup?
10. The department markup on mens wing tip shoes is 68.00%. One group of shoes
has a retail price point of $198.00. What should be the cost of shoes to use this
markup? The buyer also wants shoes at the $250.00 and $380.00 retail price
points. Keeping the same markup percent, what would happen to the potential
costs of these two groups of shoes?