Beginners in the wholesale/retail business often look for a simple formula for figuring a standard markup. Should you double the price? Multiply your cost by four? By ten? If only it were that simple. Many beginners search in vain for a simple formula like this, only to find out that in the end, it just doesn’t exist.
There’s really two parts to figuring markup. One is mathematical, and the other is just knowing your market. You may for example, have a standard rule of thumb of marking things up by three. But what if that item that cost you $10 won’t bear a $30 price tag? There may well be dozens of other web sites selling the same item for $20. As such, it’s really an individualized process for which no set formula can always apply. Besides just doing the math, you have to have a “feel” for what your product is really worth.
You may have heard the term “keystone pricing,” and this again is a rule that doesn’t have to be kept all the time. But, it can be a useful guideline. Keystone pricing simply doubles the cost to set the retail price. It’s an easy way to set prices, and if you’re doing a reasonable volume, should cover your costs–but it’s just not practical to depend on a simplistic method like keystoning for everything in your catalog.
Here’s an example: Suppose you take a trip to Thailand, and bring back a suitcase full of earrings. You can buy very nice earrings in the wholesale bazaars in Bangkok for about 50 cents a pair–and not the cheap plastic ones, either. They’re hand-made and quite attractive. Keystoning would set a price for a dollar a pair, which is very much under par for the market for good costume jewelry earrings. You can easily sell them for up to five dollars a pair, which means you’re multiplying your basic cost by ten.
If you’re selling goods you bought wholesale from a manufacturer, they may have a “manufacturer’s suggested retail price” (MSRP), which is their suggestion to you for your selling price. This too, is practical only sometimes. In the Internet world, competition is fierce, and there will be other vendors selling at below MSRP. Also, some less-than-reputable wholesalers may suggest unrealistic MSRPs just to get you excited about the product. Look at the MSRP and keep it in mind as a guideline–but then do your competitive research and see what others are selling it for.