Pricing strategies play a critical role in the success of a retail business. Retail percentages need to accomplish business objectives and ensure profit, and at the same time provide value and create loyalty. Once calculated, retail percentages integrate with merchandising programs in a continual process of monitoring and adjusting to business conditions. Strong competition, narrow profit margins, rising costs and comparison-shopping require retailers to pay close attention to pricing and calculate retail percentages accurately.
- Skill level:
- Moderately Challenging
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Things you need
- Net sales
- Cost of goods sold
- Item wholesale cost
Evaluate the equation for determining gross margin and collect accounting information. Gross margin displays as a percentage, achieved by dividing net sales revenue (gross sales revenue -- cost of goods sold) by total sales revenue.
Insert your numbers into the equation. If your net sales for the last quarter are £65,000, and cost of goods sold is £26,000, the equation will display as (100,000 -- 40,000)/100,000.
Perform the calculation and convert the result to a percentage by multiplying by 100. Using the above example, you arrive at a .60 or 60 per cent gross profit percentage.
Calculate Gross Profit Margin Percentage
Evaluate the equation using a known gross margin. If you already know the gross margin you must realise, base markup percentage on that margin. The general equations using the margin method to arrive at a markup percentage is wholesale cost/(1-margin)/100 to determine the dollar amount of the markup, and retail price -- wholesale cost/wholesale cost to determine the markup percentage.
Insert numbers and complete the first equation. If you need to realise a 60 per cent gross margin and the wholesale cost of the item is £2.60, the equation will display as 4.00/(1-.60)/100, or 4.00/(.40/100). Perform the calculation and add markup to the item to arrive at a retail sales price. Markup for this item is £6 so the retail price is £9.
Insert numbers and determine markup percentage. Using the above example, retail price is £9, wholesale cost is £2, so the equation reads as 14-4/4 = 2.5, or 250 per cent.
Calculate Markup Percentage
Evaluate the equation for determining a discount percentage. This equation displays as discount/retail price times 100 per cent.
Insert numbers into the equation. If the discount amount is £1.90 and the retail price of the item is £9.10, the equation reads as (3/14) x 100.
Complete the calculation to arrive at a discount percentage. Using the above example, you arrive at 21 per cent.
Calculating Discount Percentage
Tips and warnings
- Companies calculate gross margin most often to analyse total revenue numbers. Gross margin is the percentage of each dollar a business retains from a sale.
- Markup and margin are not the same. This can be confusing as they both deal with percentages. Using margin to determine retail price will result in higher profits and is a better idea. For example, if your business requires a 25 per cent profit margin and you use this number to determine markup, you will fall short of profit goals, as a 25 per cent markup rate produces a gross margin percentage of only 20 per cent.
- You can also determine a sale price if you already know the discount percentage you want to use. In that case, the equation is (discount percentage/100) times the original sales price. If the discount is 15 per cent, and the price is £11, the equation reads as (.15/100) times 18 to equal a discount of £1.70. The sale price of the item would be £9.90.
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