Pricing Your Products

INTRODUCTION

The primary goal of most businesses is to make a profit. There are many factors that affect the profitability of a business,
such as management, location, cost of labor, quality of product or service, market demand and competition. In our free enterprise system the right to establish a price is yours. Market demand controls the response to your product or services.

You must understand the market for your product or service, the channels of distribution and the competition before you establish prices. You must know all costs and carefully analyze them. The marketplace responds rapidly to technological advances, international competition and a knowledgeable buying public. You must constantly keep abreast of all factors that will affect pricing and be ready to make necessary changes.

This publication covers retail pricing, pricing for services and pricing for a consulting service. Appendix A is a checklist to review pricing policies and strategies. Appendix B offers suggestions for other information resources.

RETAIL PRICING
Retail Costs and Pricing

In a successful business, prices are set to cover total costs plus some margin of profit. In a retail business, two costs are associated with the product: the cost of acquiring the goods, called cost of goods, and the costs of operating the business to sell the goods, called operating expenses.

The cost of goods includes the price paid for the merchandise plus freight, import duties and any handling costs. The cost of goods can be reduced by taking advantage of quantity discounts or time payment discounts (paying before a certain date).

Operating expenses include wages, advertising, management salaries, rent, utilities and office supplies. Most of these
costs are not directly attributed to any one product item, such as a single purse; they must be spread out among all the items sold in a given time period.

General Pricing Techniques

Markup on cost is accomplished by adding some percentage of cost to the cost of goods (merchandise + shipping).
Example:

Lisa’s Purse Shop – Calculation of selling price

Cost of one purse $12.00
X Markup percentage 33%
—————————
= Markup amount $ 4.00

Cost of one purse $12.00
+ Markup amount $ 4.00
—————————
= Selling price $16.00 for one purse

The 33 percent markup must cover all operating expenses (wages, rent, advertising, etc.) and provide some margin of profit. For example, Lisa’s Purse Shop may figure 10 percent for wages, 6 percent for rent, 4 percent for advertising and 13 percent for profit.

The markup is sometimes expressed as a percentage of selling or retail price instead of cost. Most retailers prefer to express their markup as a percentage of retail price. Using the example above you would determine the retail markup percentage as follows:

$ 4.00 = dollar amount of markup = 25% retail markup
——
$16.00 = retail selling price

A business might choose to use a standard markup percentage on all products, or it may have different markups for different goods. A problem with the standard markup is that it doesn’t recognize cost differences in selling different products. If product A costs far more to advertise or sell than product B, a standard markup percentage may produce a loss on product A and a greater-than-average profit on product B.

It is important to maintain an overall or average percentage of markup to return the profit percentage you establish. You must also allow for markdowns. Therefore, you must establish an initial markup percentage, which becomes the average markup. The initial markup is figured as follows:

Operating expenses + desired profit
Initial markup percentage = ———————————–
Net sales

Breakeven

Breakeven is simply the point at which all costs are recovered and you begin to make a profit. Once you have established an average markup, the breakeven point can be determined. There are several formulas to use in determining breakeven. One simple formula is provided here, but we recommend that you check with your accountant or an accounting textbook to fully understand how best to figure a breakeven for your business.

Operating expenses
Breakeven point = ——————–
Markup percentage

example:

$50,000 = operating expenses
——- = $166,666.67 breakeven
30% = markup percentage sales
(average)

The breakeven price is figured the same for a service business as it is for a product-based business. However, many business owners prefer to figure breakeven for individual products or services, so they know which products to promote or discontinue.

Suggested retail price. A common pricing practice among small businesses is to follow the suggested retail prices supplied by the manufacturer. This allows the business to avoid the decision-making process and the trouble of monitoring the competition. The suggested retail price is easy to use, but it can cause problems. It may create an undesirable price image, and it doesn’t consider the competition.

Competitive position refers to a strategy in which a firm bases its prices on those of its competitors. A small retailer should
compare prices with similar stores. Do not try to compete with the prices set by large stores they can buy larger volumes, so their cost per unit is less. Instead, look at non-price issues. For example, compare the services offered by the competition. Often customers will pay more for merchandise to obtain the type of service that they seek.

Pricing below competition means beating the competitor’s price. Many vendors have been very successful using this pricing strategy, because they have greatly increased sales. Because this pricing strategy reduces the profit margin per sale, a firm needs to increase its sales and reduce costs.

  • Obtain the best prices possible for the merchandise.
  • Locate the business in an inexpensive area or facility.
  • Closely control inventory.
  • Limit the lines to fast-moving items.
  • Design advertising to concentrate on price specials.
  • Offer no or limited services.

Below competition pricing is a difficult pricing policy to maintain, because every cost component must constantly be monitored and consistently adjusted. It also exposes firms to pricing wars competitors can retaliate by matching the price cutter, leaving both parties worse off.

Pricing above the competition is possible when non-price considerations are important to buyers. Non-price considerations that may be important enough to customers to justify higher prices include

  • service considerations, such as delivery, speed of service,
    satisfactory handling of customer complaints, knowledge of
    product or service, and a helpful and friendly attitude;
  • a convenient or exclusive location; and
  • exclusive merchandise. A store may carry lines of well-known or
    high-quality brand names that are not available elsewhere. A
    store might get particular brands for a given trade area. The use
    of exclusive agreements avoids competitive pricing.

Markdowns, or price reductions, are a necessary part of doing business because inventory levels may become too high as a result of overbuying, seasonal merchandise, shopworn merchandise, misjudged customer responses, poor personal selling, lack of promotion and advertising or the competition’s lowering the price of the same merchandise.

There are a number of theories about when it is best to take markdowns. This is a decision that will vary greatly with the type of merchandise, amount of competition, season of the year and amount of stock on hand. Every business should try to avoid being left with a lot of dated merchandise that will be difficult to sell.

Price lining refers to a marketing strategy based on price. This strategy targets a specific segment of the buying public by carrying products only in a specific price range. For example, a store may wish to attract customers willing to pay over $50 for a purse. Price lining has many advantages, among them the following:

  • reduced errors by sales personnel;
  • ease of selection for customers;
  • reduced inventory by limiting the number of items in a category;
  • reduced storage costs as a result of smaller inventory;
  • ease of merchandise selection; and
  • merchandise targeted to clientele.

A disadvantage to price lining is that by focusing too much on price, the store may overlook issues of quality or consumer buying trends. It also limits the ability of the business to meet competitors’ prices.

Odd pricing — with figures that end in 5, 7 and most often 9 — is used for psychological reasons. Consumers tend to round down a price of $39.95 to $39, rather than rounding it up to $40. However, this is not considered to be as effective today as it was in the past.

Multiple pricing is the practice of promoting a number of units for a single price. For example, two for $1.98. This is useful primarily in low-cost, consumable products such as shampoo or toothpaste. Many stores find this to be a desirable pricing strategy for sales and year-end clearances.

PRICING FOR SERVICES

Service business pricing is more complex than retail pricing; however, the price is reached the same way cost plus operating expenses plus the desired profit. Services are more difficult to price because costs may be harder to estimate and the competition might not be as easy to compare.

Service Costs and Pricing

Each service has different costs. Many small service businesses fail to analyze the costs involved in each service and therefore fail to price their services profitably. They may make a profit on certain services and lose money on others, not knowing which is which. By analyzing the costs associated with each service, you can set prices to maximize profits and eliminate unprofitable services.

Components of Costs for Services

The cost of producing any service is composed of three parts:

  1. materials
  2. labor
  3. overhead

Materials cost is the cost of materials used directly in the final product, such as spark plugs and gaskets in the repair of an
engine. Supplies such as paper towels are part of overhead, not materials costs. Materials costs must be determined and updated frequently. A cost list must always be used in preparing a bid or quoting a job. If there are shipping, handling or storage costs for materials, they must be included in the total materials costs.

Labor cost is the cost of work directly applied to a service, such as a mechanic’s work. Work not directly applied to the service, such as cleaning up, is an overhead cost. Direct labor costs are derived by multiplying the cost of labor per hour by the number of hours required to complete the job. Use a time card and clock to determine the number of hours of labor involved in each service. Remember to include not only the amount paid directly to the worker, but also all fringe benefits. These include social security, workers’ compensation, unemployment compensation and any other benefits such as insurance and retirement benefits.

Example: Graham’s Garage
——————-
Labor cost per hour

Hourly wages = $10.00/hr
Fringe benefits = $ 3.00/hr (or 30%)*
———
Total costs = $13.00/hr.

*30% is a common benefit percentage.

Overhead cost includes all costs other than direct materials and direct labor. Overhead is the indirect cost of the service. Usually there are people on a company’s payroll who perform support services that are not charged to direct labor but must be included as a cost. Some examples of these services are clerical, payroll, legal, janitorial and supply. Insurance, taxes, depreciation, rent, accounting, advertising, office supplies, utilities and transportation are also part of the overhead cost.

A reasonable amount of the overhead cost must be allocated to each service performed. The overhead rate can be expressed as a percentage or as an hourly rate.

In many businesses, more expensive equipment is used by higher paid employees; thus, overhead cost is more closely related to labor cost than to labor hours. In this situation, the overhead cost is allocated on the basis of direct labor cost and expressed as a percentage as follows:

Total overhead cost
Overhead rate = ———————–
Total direct labor cost

This format is most commonly used in businesses such as machine shops, automotive repair shops, and job shop production. When there is relatively little difference between the hourly wages for employees, or little relationship between worker skill and equipment used, the following hourly rate formula is followed:

Total overhead cost
Overhead rate = ————————
Total direct labor hours

The following examples show the two types of overhead rate calculation:

Graham’s Garage
—————————-
Calculation of overhead rate

Overhead rate Total overhead costs
(percentage) = ——————–
Total direct labor costs

$40,000.00
= ———-
$50,000.00
or = 0.8 or 80%

Overhead rate Total overhead costs
(hourly rate) = ——————–
Total direct labor hours

$40,000.00
= ———–
4,000 hours

= $10.00 per direct labor hour

In developing overhead costs it is important not to depend on last year’s costs. Charges must be revised to reflect current costs, including inflation and higher benefit rates. It is best to project the costs for the current six-month period and include increased executive salaries as well as any other projected costs.

Examples of a Cost Calculation

Here is an example combining the components of costs to determine the total cost of a single job:

Graham’s Garage
—————-
Total cost to fix Mr. Rhodes’ car:

Material cost = $18.00 + 2.00
= $20.00

Labor cost = Direct labor cost per hour x hours required
= $13.00 per hour x 3 hours
= $39.00

Two types of overhead rate have been discussed. We will use both
to calculate overhead cost for the example:

Overhead cost = Direct labor cost x overhead rate
= $39.00 x 80%
= $31.20
or

Overhead cost = Direct labor hours x overhead rate
= 3 hours x $10.00 per hour
= $30.00

Because Graham’s Garage usually uses the “percent of cost” overhead rate, we will use the $31.20 figure instead of $30.00 as the overhead cost. The total cost of the repair is tallied below.

Material cost = $20.00
Direct labor = $39.00
Overhead cost = $31.20
——
Total $90.20

Figuring Profit

Profit can be figured several ways. One way is to add a percentage to each of the cost factors, for example,

Material Labor Overhead Total
———————————————————–
Cost $20.00 $39.00 $31.20 $90.20
x percent x 15% x 25% x 25%
——— —— —— —— ——
= profit $ 3.00 $ 9.75 $ 7.80 $20.55

Cost $20.00 $39.00 $31.20 $90.20
+ profit $ 3.00 $ 9.75 $ 7.50 $20.55
——– —— —— —— ——
= charge $23.00 $48.75 $38.70 $110.75

Another way is to decide that you wish to make a 20 percent profit. Then you can simply add all of the costs plus 20 percent of the total ($90 cost 20% = $18; $90 $18 = $108 = price). There may be times when you purchase materials at a lower price and can therefore add a higher percentage of profit.

Figuring Costs and Profits for a Consulting Service

Pricing consulting services, where primarily one’s own labor or expertise is used, is somewhat different from pricing a service that uses materials and the labor of others. Most consultants price their service by the hour. If they are senior consultants they will charge more for their own time than for the use of a junior or less experienced consultant. The rate varies depending on the nature of the assignment and the individual’s expertise. However, it is very important that one charge for an adequate number of hours. Travel time must also be included; usually the travel expense is an extra charge. Sometimes a consultant is asked to price a service on a contract basis. The contract should take into account professional time, clerical support, computer or other special services (such as printing) and overhead expenses (rent, utilities, equipment, supplies, sales and marketing expenses, insurance and fringe benefits).

The following is an example:

Law Firm of Dixon & Wesley
————————–
Charges for services in month of August

Professional charges:
Senior consultant 10 hours @ $75.00 = $ 750.00
Junior consultant 15 hours @ $35.00 = $ 525.00
Clerical 7 hours @ $18.00 = $ 126.00
——– ——–
Total 32 hours $1401.00

$10,300 Overhead expense per year
Overhead rates: ———————————
1,030 Chargeable hours per year

= $10.00 per hour

Overhead charge rate = chargeable hours x overhead
= 32 x $10 = $320.00

Travel:

Airfare at $275.00 x 2 trips = $ 550.00
Per diem at $120.00 per day x 3 days = $ 375.00
Contract total = $2646.00

In selling consulting and other professional services it is unlikely that 100 percent of spent time will be billed to clients. Therefore, hourly or contract fees must be substantial enough to cover costs during slow periods. It is for this reason that one-half of the total normal yearly work hours is used in figuring overhead rates. It is desirable to obtain a long-term, monthly or contract assignment whenever possible.

A common mistake of many new or inexperienced consultants is to underestimate the number of hours and additional charges or expenses that they may incur. If the policy is to charge only an hourly rate plus travel expenses, be sure that the hourly rate will cover salary requirements, operating expenses and the profit percentage you desire.

Checklist for Pricing Policies and Strategies

The following list of questions will help you select the pricing policies and strategies that will best suit your business, allowing you to remain competitive and providing you with the profit you want.

  1. Do you price all items at a level that provides an adequate
    profit margin? If not, why?
  2. Do you constantly monitor costs and make price changes to
    provide for continued profitability, particularly in periods of
    rapid inflation?
  3. Do you price to cover your variable costs and fixed costs?
  4. Is your goal to find the price-volume combination that will
    maximize profits?
  5. When setting a price strategy, do you consider these factors:
    a. channels of distribution?
    b. competitive and legal forces?
    c. annual volume and life-cycle volume?
    d. opportunities for special market promotions?
  6. Is your price consistent with the product image?
  7. Because customers often equate the quality of unknown products
    with their price, do you adjust prices accordingly?
  8. Do you reduce prices whenever the added volume resulting from
    the reduction produces sufficient sales revenue to offset the
    added costs of increased production?
  9. When reducing prices, do you consider your competitors’
    probable reactions?
  10. Do you want your firm to be a price leader?
  11. Do your initial markups cover
    a. operations, particularly selling expenses?
    b. profit?
    c. subsequent price reductions?
  12. Does your company break down costs by product to price
    effectively?
  13. Does your company practice price lining?
  14. Does your company practice odd pricing?
  15. To avoid retaliation by competitors, have you tried adding
    extra services, providing warranties or paying transportation
    costs rather than lowering prices?
  16. Do you realize that facilities have certain costs whether you
    use them or not?

Use the next few blank lines to write in question that may be of
specific concern to your business’s pricing structures.

17. ————————————————–
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19. ————————————————–
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20. ————————————————–
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21. ————————————————–
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Summary

Remember, although it is your right to establish prices for your products and services, it is your customers who will decide whether they are willing and able to pay your price, and your competitors will influence your customers’ buying decisions. We recommend that you do extensive research on your industry or business, your products or services, your customers and your competition. This publication is intended to be an overview; we advise that you check with local bookstores, libraries and universities for additional sources of information on pricing and profits. Accounting textbooks are often helpful. You may also want to obtain other U.S. Small Business Administration publications (see Appendix B: Information Resources).

It is difficult to say which component of pricing is more important than another. The key to success is to have a well-planned strategy and established policies and to constantly monitor prices and operating costs to ensure a profit. It is very important that you project the percentage of markdowns anticipated and build them into your initial price to obtain the projected profit. For a consulting business, you should project how many hours of your services you will need to bill.

It is important to remember that the image of your business is crucial to obtaining and keeping the clientele and that your pricing structure and policies are a major component of your image.

APPENDIX A: PRICING CHECKLIST FOR RETAILERS

These 52 questions probe the considerationsfrom markup to pricing
strategy to adjustmentsthat lead to correct pricing decisions.
You can use this checklist to establish prices in your store or
to periodically review your pricing policy.

Price influences the quantities of various items that consumers
will buy which in turn affects total revenue and profit. Thus
correct pricing decisions are a key to successful retail
management. The checklist has been developed to help smaller
retailers make systematic informed decisions on pricing
strategies and tactics.

This checklist should be especially useful to a new retailer who
is making pricing decisions for the first time; however
established retailers can also benefit. They can use it as a
reminder of all the individual pricing decisions they should
review periodically. It can also be used to train new employees
who will have pricing authority.

The Central Concept of Markup

A major step toward making a profit in retailing is selling
merchandise at a retail price called markup (or occasionally
markon). From an arithmetic standpoint markup is calculated as
follows:

Dollar markup = Retail price – Cost of the merchandise

Dollar markup
Percentage markup = ————-
Retail price

If an item cost $6.50 and you believe consumers will buy it at
$10 the dollar markup is $3.50 ($10 $6.50). The percentage
markup is 35 percent ($3.50 divided by $10). Anyone involved in
retail pricing should be as knowledgeable about these two
formulas as about the name and preferences of his or her best
customer!

Two other key points about markup should be mentioned. First the
cost of merchandise used to calculate markup consists of the base
invoice price for the merchandise plus any transportation charges
minus any quantity and cash discounts given by the seller. Second
retail price rather than cost is ordinarily used to calculate
percentage markup. The reason for this is that when other
operating figures – such as wages advertising expenses and
profits – are expressed as a percentage all are based on retail
price rather than cost of the merchandise.

Target Consumers and the Retailing Mix

In this section your attention is directed to price as it relates
to your potential customers. These questions examine merchandise
location promotion and customer services that will be combined
with price to attempt to satisfy shoppers and make a profit.

Yes No

1. Is the relative price of this item very important to your
target consumers?

The importance of price depends on the specific product and on
the specific individual. Some shoppers are very price conscious;
others want convenience and knowledgeable sales personnel.
Because of these variations you need to learn about your
customers’ desires in relation to different products. Having
sales personnel seek feedback from shoppers is a good starting
point.

2. Are prices based on estimates of the number of units that
consumers will demand at various price levels?

Demand-oriented pricing is superior to cost-oriented pricing. In
the cost approach a predetermined amount is added to the cost of
the merchandise whereas the demand approach considers what
consumers are willing to pay.

3. Have you established a price range for the product?

The cost of merchandise will be at one end of the price range and
the level above which consumers will not buy the product at the
other end.

4. Have you considered what price strategies would be compatible
with your store’s total retailing mix including merchandise
location promotion and services?

5. Will trade-ins be accepted as part of the purchase price on
items such as appliances and television sets?

Supplier and Competitor Considerations

This set of questions looks outside your firm to two factors that
you cannot directly controlsuppliers and competitors.

Yes No

6. Do you have final pricing authority?

With the repeal of fair trade laws yes answers will be more
common than in previous years. Still a supplier can control
retail prices by refusing to deal with nonconforming stores (a
tactic that may be illegal) or by selling to you on consignment.

7. Do you know what direct competitors are doing price-wise?

8. Do you regularly review competitors’ ads to obtain information
on their prices?

9. Is your store large enough to employ either a full-time or
part-time comparison shopper?

These three questions emphasize the point that you must watch
competitors’ prices so that your prices will not be far out of
line – too high or too low – without good reason. Of course there may
be a good reason for out-of-the-ordinary prices such as seeking a
special price image.

A Price Level Strategy

Selecting a general level of prices in relation to competition is
a key strategic decision perhaps the most important.
Yes No

10. Should your overall strategy be to sell at prevailing market
price levels?

The other alternatives are an above-the-market strategy or a
below-the-market strategy.

11. Should competitors’ temporary price reductions ever be
matched?

12. Could private-brand merchandise be obtained to avoid direct
price competition?

Calculating Planned Initial Markup

In this section you will have to look inside your business taking
into account sales expenses and profits before setting prices.
The point is that your initial markup must be large enough to
cover anticipated expenses and reductions and still produce a
satisfactory profit.
Yes No

13. Have you estimated sales operating expenses and reductions for
the next selling season?

14. Have you established a profit objective for the next selling
season?

15. Given estimated sales expenses and reductions have you planned
initial markup?

This figure is calculated with the following formula:
Initial markup

Operating expenses + reductions + profit
Percentage = —————————————-
Net sales + reductions

Reductions consist of markdowns stock shortages and employee and
customer discounts. The example uses dollar amounts but estimates
can also be percentages. If the retailer wants a $4000 profit
initial markup percentage can be calculated as follows:

$34,000 + $6,000
Initial markup percentage = + $4,000 = 44%
—————-
$94,000 + $6,000

Yes No
The resulting figure, 44 percent in this example, indicates
the markup needed on the average to make the desired profit.

16. Would it be appropriate to have different initial markup
figures for various lines of merchandise or services?

You should seriously consider different markup figures when some
lines have very different characteristics. For instancea clothing
retailer might logically have different initial markup figures
for suits shirts pants and accessories. You may want those items
with the highest turnover rates to carry the lowest initial
markup.

Store Policies

Having calculated an initial markup figure you could proceed to
set prices on your merchandise. But an important decision such as
this should not be rushed. Instead you should consider additional
factors that suggest what would be the best price.
Yes No

17. Is your tentative price compatible with established store
policies?

Policies are written guidelines indicating appropriate methods or
action in different situations. If established with care they can
save you time in decision making and provide for consistent
treatment of shoppers. You should consider the following policy
areas:

18. Will a one-price system under which the same price is charged
to every purchaser of a particular item be used on all items?

The alternative is to negotiate price with consumers.

19. Will odd-ending prices, such as $1.98 or $44.95, be more
appealing to your customers than even-ending prices?

20. Will consumers buy more if multiple pricing, such as two for
$8.50, is used?

21. Should any leader offerings (selected products with quite low
less profitable prices) be used?

22. Have the characteristics of an effective leader offering been
considered?

Ordinarily a leader offering needs the following characteristics
to accomplish its purpose of generating shopper traffic: used by
most peoplebought frequently very familiar regular price and not
a large expenditure for consumers.

23. Will price lining – the practice of setting up distinct price
points such as $5.00, $7.50 and $10.00, and then marking all
related merchandise at these points – be used?

24. Would price lining by zones (such as $5.00 – $7.50 and
$12.50 – $15.00) be more appropriate than price points?

25. Will cents-off coupons be used in newspaper ads or mailed to
selected consumers on any occasion?

26. Would periodic special sales, combining reduced prices and
heavier advertising, be consistent with the store image you are
seeking?

27. Do certain items have greater appeal than others when they
are part of a special sale?

28. Has the impact of various sale items on profit been
considered?

Sale prices may mean little or no profit on these items but the
sale may contribute to total profits by bringing in shoppers who
may also buy some regularly priced (and profitable) merchandise
and by attracting new customers. You should avoid featuring items
that require a large amount of labor which in turn would reduce
or erase profits. For instance according to this criterion shirts
would be a better special sale item than men’s suits that often
require free alterations.

29. Will rain checks be issued to consumers who come in for
merchandise that is temporarily out of stock?

Rain checks are required in some situations. Consult your lawyer
or the regional Federal Trade Commission office for specific
advice regarding whether they are needed in the sale you plan.

Nature of the Merchandise

In this section you will be considering how selected
characteristics of particular merchandise affect planned initial
markup.
Yes No
30. Did you get a “good deal” on the wholesale price of
this merchandise?

31. Is this item at the peak of its popularity?

32. Are handling and selling costs relatively great due to the
bulkiness of the product, its low turnover rate or its requiring
much personal selling, installation or alterations?

33. Are relatively large reductions expected due to markdowns
spoilage, breakage or theft?

With respect to the preceding four questions “yes” answers
suggest the possibility of or need for larger than normal
initial markups. For example very fashionable clothing often
carries a higher markup than basic clothing such as underwear
because the particular fashion may suddenly lose its appeal to
consumers.

34. Will customer services such as delivery alterations gift
wrapping and installation be free to customers?

The alternative is to charge for some or all of these services.

Environmental Considerations

The questions in this section focus your attention on three
factors outside your business: economic conditions laws and
consumerism.
Yes No
35. If your state has an unfair sales practices act that requires
minimum markups on certain merchandise do your prices comply with
this statute?

36. Are economic conditions in your trading area abnormal?

Consumers tend to be more price-conscious when the economy is
depressed suggesting that lower than normal markups may be needed
to be competitive. On the other hand, shoppers are less
price-conscious when the economy is booming, which would permit
larger markups (on a selective basis).

37. Are the ways in which your prices are displayed and promoted
compatible with consumerism, one part of which has been a call for
more straightforward price information?

38. If yours is a grocery store, is it feasible to use unit
pricing in which the item’s cost per some standard measure is
indicated?

Having answered these questions, you are ready to establish
retail prices. When you have decided on an appropriate percentage
markup, 35 percent on a garden hose for example, the next step is
to determine what percentage of the still unknown retail price is
represented by the cost figure. The basic markup formula is
simply rearranged to do this:

Cost = Retail price – markup
Cost = 100% – 35% = 65%

The dollar cost, say $3.25 for the garden hose, is plugged into
the following formula to arrive at the retail price:

Dollar cost $3.25
Retail price = ————— = ———– = $5.00
Percentage cost 65% (or .65)

One other consideration is necessary:

Yes No
39. Is the retail price consistent with your planned initial
markup?

Adjustments

It would be ideal if all items sold at their original retail
prices. But we know that things are not always ideal. Therefore a
section on price adjustments is necessary.
Yes No
40. Are additional markups called for because wholesale prices
have increased or because an item’s low price causes consumers to
question its quality?

41. Should employees be given purchase discounts?

42. Should any groups of customers, such as students or senior
citizens, be given purchase discounts?

43. When markdowns appear necessary, have you first considered
other alternatives, such as retaining price but changing another
element of the retailing mix or storing the merchandise until the
next selling season?

44. Has an attempt been made to identify causes of markdown so
that steps can be taken to minimize the number of avoidable
buying selling and pricing errors that cause markdowns?

45. Has the relationship between timing and size of markdowns
been taken into account?

In general, markdowns taken early in the selling season or
shortly after sales slow down are smaller than late markdowns.
Whether an early or late markdown is appropriate in a particular
situation depends on how many consumers might still be interested
in the product, the size of the initial markup and the amount of
merchandise remaining in stock.

46. Would scheduled or automatic markdowns at specified intervals
be appropriate?

47. Is the size of the markdown “just enough” to stimulate
purchases?

This question stresses the point that you have to observe the
effects of markdowns so that you know what size markdowns are
“just enough.”

48. Has a procedure been worked out for markdowns on price-lined
merchandise?

49. Is the markdown price calculated from the off-retail
percentage?

This question gets you into the arithmetic of markdowns. Usually,
you first tentatively decide on the percentage amount price must
be marked down to excite consumers. For example, if you think a
25 percent markdown will be necessary to sell a lavender sofa, the
dollar amount of the markdown is calculated as follows:

Dollar markdown – Off-retail percentage
x Previous retail price

Dollar markdown – 25% (or .25) x $500 = $125

The markdown price is obtained by subtracting the dollar
markdown from the previous retail price. The sofa would be $375
after taking the markdown.

50. Has the cost of the merchandise been considered before
setting the markdown price?

This is not to say that a markdown price should never be lower
than cost; on the contrary, a price that low may be your only hope
of generating some revenue from the item. But cost should be
considered to make sure that below-cost markdown prices are the
exception in your store rather than being so common that your
total profits suffer.

51. Have procedures for recording the dollar amount percentages
and probable cause of markdowns been set up?

Markdown analysis can provide information to help calculate
initial markup, to reduce errors that cause markdowns and to
evaluate suppliers.

52. Have you marked the calendar for a periodic review of your
pricing decision?

This checklist should help you avoid making careless pricing
decisions and lay a solid foundation of effective prices to build
retail profits.

APPENDIX B: INFORMATION RESOURCES

U.S. Small Business Administration (SBA)

The SBA offers an extensive selection of information on most
business management topics, from how to start a business to
exporting your products.

This information is listed in The Small Business Directory. For a
free copy contact your nearest SBA office.

SBA has offices throughout the country. Consult the U.S. Government
section in your telephone directory for the office nearest you. SBA
offers a number of programs and services, including training and
educational programs, counseling services, financial programs and
contract assistance. Ask about

* Service Corps of Retired Executives (SCORE), a national
organization sponsored by SBA of over 13,000 volunteer
business executives who provide free counseling,
workshops and seminars to prospective and existing small
business people.

* Small Business Development Centers (SBDCs), sponsored by
the SBA in partnership with state and local governments,
the educational community and the private sector. They
provide assistance, counseling and training to
prospective and existing business people.

* Small Business Institutes (SBIs),organized through SBA on
more than 500 college campuses nationwide. The institutes
provide counseling by students and faculty to small
business clients.

For more information about SBA business development programs and
services call the SBA Small Business Answer Desk at 1-800-U-ASK-SBA
(827-5722).

Other U.S. Government Resources

Many publications on business management and other related topics
are available from the Government Printing Office (GPO). GPO
bookstores are located in 24 major cities and are listed in the
Yellow Pages under the bookstore heading. You can request a Subject
Bibliography by writing to Government Printing Office,
Superintendent of Documents, Washington, DC 20402-9328.

Many federal agencies offer publications of interest to small
businesses. There is a nominal fee for some, but most are free.
Below is a selected list of government agencies that provide
publications and other services targeted to small businesses. To
get their publications, contact the regional offices listed in the
telephone directory or write to the addresses below:

Consumer Information Center (CIC)
P.O. Box 100
Pueblo, CO 81002
The CIC offers a consumer information catalog of federal
publications.

Consumer Product Safety Commission (CPSC)
Publications Request
Washington, DC 20207
The CPSC offers guidelines for product safety requirements.

U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
The USDA offers publications on selling to the USDA. Publications
and programs on entrepreneurship are also available through county
extension offices nationwide.

U.S. Department of Commerce (DOC)
Office of Business Liaison
14th Street and Constitution Avenue, NW
Room 5898C
Washington, DC 20230
DOC’s Business Assistance Center provides listings of business
opportunities available in the federal government. This service
also will refer businesses to different programs and services in
the DOC and other federal agencies.

U.S. Department of Health and Human Services (HHS)
Public Health Service
Alcohol, Drug Abuse and Mental Health
Administration
5600 Fishers Lane
Rockville, MD 20857
Drug Free Workplace Helpline: 1-800-843-4971. Provides information
on Employee Assistance Programs.National Institute for Drug Abuse
Hotline: 1-800-662-4357. Provides information on preventing
substance abuse in the workplace.The National Clearinghouse for
Alcohol and Drug Information: 1-800-729-6686 toll-free. Provides
pamphlets and resource materials on substance abuse.

U.S. Department of Labor (DOL)
Employment Standards Administration
200 Constitution Avenue, NW
Washington, DC 20210
The DOL offers publications on compliance with labor laws.

U.S. Department of Treasury
Internal Revenue Service (IRS)
P.O. Box 25866
Richmond, VA 23260
1-800-424-3676
The IRS offers information on tax requirements for small
businesses.

U.S. Environmental Protection Agency (EPA)
Small Business Ombudsman
401 M Street, SW (A-149C)
Washington, DC 20460
1-800-368-5888 except DC and VA
703-557-1938 in DC and VA
The EPA offers more than 100 publications designed to help small
businesses understand how they can comply with EPA regulations.

U.S. Food and Drug Administration (FDA)
FDA Center for Food Safety and Applied Nutrition
200 Charles Street, SW
Washington, DC 20402
The FDA offers information on packaging and labeling requirements
for food and food-related products.

For More Information

A librarian can help you locate the specific information you need
in reference books. Most libraries have a variety of directories,
indexes and encyclopedias that cover many business topics. They
also have other resources, such as

* Trade association information
Ask the librarian to show you a directory of trade associations. Associations provide a valuable network of resources to their members through publications and services such as newsletters, conferences and seminars.

* Books
Many guidebooks, textbooks and manuals on small business are published annually. To find the names of books not in your local library check Books In Print, a directory of books currently available from publishers.

* Magazine and newspaper articles
Business and professional magazines provide information that is more current than that found in books and textbooks. There are a number of indexes to help you find specific articles in periodicals.

In addition to books and magazines, many libraries offer free workshops, lend skill-building tapes and have catalogues and brochures describing continuing education opportunities.

—————————————————————–
This publication is protected under copyright. No part may be re-produced, transmitted or transcribed without the permission of the author. SBA retains an irrevocable, worldwide, nonexclusive, royalty-free, unlimited license to use this copyrighted material.

While we consider the contents of this publication to be of general merit, its sponsorship by the U.S. Small Business Administration does not necessarily constitute an endorsement of the views and opinions of the authors or the products and services of the companies with which they are affiliated.

—————————————————————–

All of SBA’s programs and services are extended to the public on a nondiscriminatory basis.

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SMBReviews is committed to providing small and mid-sized business owners with the information and resources they need to select the best service or product for their company.

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