Keystone pricing is a retail industry practice of setting the retail price for an item at twice the amount it cost the retailer, or doubling the cost. This gives the retailer a 50% gross margin, since the selling price is greater than the cost by 50%. It doesn’t mean the retailer is making twice the amount of an item’s cost as profit.
For example, suppose the retailer pays $100 for a pair of hockey skates. Using the keystone pricing method, the retailer doubles the cost and sets the retail or selling price of the skates at $200. Half this amount is gross profit. Bear in mind, the seller must pay overhead and other expenses such as building costs, electricity, salaries, taxes, and insurance from this gross profit before realizing a net profit, but the keystone price usually allows the retailer to earn a reasonable profit.
The traditional keystone pricing model applies to purchases made by the retailer also. The vendor who sells the skates to the retailer normally uses keystone pricing for the price charged to the retailer. So using the example above, the vendor pays $50 to purchase the skates from the manufacturer and doubles the price paid by the retailer to $100.
Retailers can no longer use the keystone pricing for some items because they cannot sell certain goods for twice the amount paid. These items now have small markups because consumers simply refuse too pay that much for them and there are competing retailers offering items at or close to cost to attract business. Items such as computers, televisions, and appliances are some products with relatively small margins now due to competitive pricing by other retailers and consumers being more price-conscious. Despite this, keystone pricing is still common for some categories, such as clothing, which typically gets marked down by 50% or more when the season ends. In this case, the retailer relies on profits from items sold at full price to cover any losses due to seasonal markdowns. Now it is quite common for retailers to adjust the keystone mark-up higher to cover higher costs, or lower to remain competitive.