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www.IndependentRetailer.com MARKETING Markups &
Markdowns continued from page 117
Example: Let’s say that our
net profi t goal is 7 percent, op- erating expenses are 40 percent and markdowns are 18 percent of sales. Given the formula above, the IMU percentage would have to be 55 percent to cover the mark- downs, pay the overhead and still contribute 7 percent to the bottom line.
If the store average is say
52 percent on average, net profi t would decrease to 3.4 percent right from the start, given the example above. If you do the math, that is nearly a 50 percent reduction in profi t. To restate the message,
initial markup is directly related to net profi t. You must begin with enough markup in the beginning, in order to have something left at the end. It is a good practice for all
stores to review pricing practices on a regular basis. Competitive pressures, changes in operating expenses and availability of pro- motional goods all come into play when deciding on a markup goal. Are you making markup decisions based on what a product will sell for, or what you paid for it? One way to avoid falling into the trap of cost-based pricing can be done when buyers are at market. The best time to determine what the actual selling price will be is at the time the order is written. In my previous retail career, I would
often have our buyers decide what they thought they could sell a cer- tain item for, prior to knowing the cost. Once we knew the cost, we would make a decision to buy or pass the item. Basing the retail price around the intrinsic value of the merchandise, instead of it’s cost, helped us to increase our initial markup. Perhaps this strategy would work for your store as well.
The Truth About Markdowns
The word itself strikes fear in
the hearts of most retailers. Call it by whatever term you wish, “price adjustment,” “promotion,” or just plain “sale,” the translation is the same and conjures up all
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118 August 2011
INDEPENDENTRETAILER
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