If you’re a first-time retailer, you might be hesitant or uncertain when it comes to setting prices for your wares. Keystone pricing can help you find the sweet spot. So what is keystone pricing? A retail industry practice, keystone pricing sets your retail price for specific items at twice the amount you paid. By doubling your cost in this manner, you set your business’ gross profit margin at 100%, making the selling price 100% greater than the cost. Keep in mind, however, that keystone pricing doesn’t mean you that your profit is 100%.
Retail Keystone Pricing Example
Let’s say you pay $100 for a pair of hockey skates. Using the keystone pricing method, you double the cost to set your retail selling price. This makes the retail price you set for your hockey skates $200. Half the $200 amount — or $100 — represents your business’ gross profit. While that might seem like you make a lot per sale, you can’t keep all the $100 of gross profit. To find your net profit, or the amount of each sale you get to keep, you subtract direct and indirect costs such as overhead, rent, utilities, salaries, taxes, and insurance, among other expenses. Though keystone pricing doesn’t let you double your money, it typically allows you to earn a reasonable profit.
Wholesale Keystone Profit Margin
As a retailer, you’re not the only business along the supply chain that makes use of the keystone pricing method. The traditional keystone pricing model applies not just to retailers who sell to the public, but also to the companies that sell retailers their merchandise so they can enjoy a reasonable profit margin themselves. Let’s say that the vendor who sold you the skates used the keystone pricing method to quote you costs for your order. By following the same example above, the vendor paid $50 for the skates that it sold to you for $100, which you then sold to your customer for $200.
Exceptions to Keystone Pricing
Retailers can’t use keystone pricing on some items, simply because some items just don’t sell at twice the amount retailers must pay. Items with smaller markups due to customers who expect low prices and fierce market competition include computers, televisions, and appliances. All these items typically have small profit margins, and some retailers even keep their pricing for these items near the break-even point so they can possibly convince customers who arrive looking for low-price items to also purchase items with higher profit margins to go along with their new item.
Keystone Pricing in the Clothing Industry
You’ll often find keystone pricing at work in the retail clothing industry. When you sell clothing, accessories, and shoes, you typically use keystone pricing and mark your wares up 100% at the first of the season. If you don’t sell these items before they go out of season, you typically have to mark them down 50% or more to get them out of the way for more profitable items. In these instances, keystone pricing lets you profit from the items you sell at full price and cover losses on seasonal markdowns. Additionally, many retailers adjust keystone mark-ups higher for hard-to-get items or lower to stay competitive with other retailers.
While keystone pricing doesn’t always provide an exact price for the products you sell, using this method for mark-ups gives you a ballpark figure to start the pricing process. To get the best results for your business, it helps to have your finger on the pulse of your retail market and stay ready to make adjustments based on costs and competition. To keep better track of all the financial factors at play in your small business, you can take the path of the 4.3 million customers who use QuickBooks. Join them today to help your business thrive for free.