Calculating Selling Price

Calculating Selling Price
PROFIT - Revenue remaining after the
expenses of running the business have been
Factors that affect profit:
Demand - If demand for a product or service declines, the price of
the good must be lowered in order to move it off of the store’s
shelves. By lowering the price, a business owner suffers a loss of
Business expenses - All business expenses affect profit. It is vital
that business owners examine expenses and make every effort to
minimize expenses associated with operating the business.
Prices - Accurately determining the price of merchandise will ensure
maximum sales and maximum profit.
The economy - The economic conditions that exist in a given area
can affect profit by having an impact on consumer buying power,
thus demand.
Chance - Sometimes a business owner simply chooses to stock the
wrong merchandise.
Ways to Increase Profit
Increase worker efficiency - Business owners should
carefully consider what tasks need to be done each day
and schedule employees accordingly. Over-staffing
results in employees without anything to do. Time is
money to a business owner.
Increase sales - By increasing sales, whether prices have
to lowered in order to do so or not, profit can be
Reduce business expenses -Business owners strive to
negotiate the best terms for delivery, leases, rental rates,
etc. and after careful examination must make decisions
when expenses become a liability to cash flow.
Cost of Merchandise Sold
Is the amount paid by a
business for products
purchased for resale or
for use in the
production of other
Are the first expenses
that must be paid.
Is deducted directly
from sales revenue to
determine gross profit.
Formula (used on the
income statement):
Sales Revenue
- Cost of merchandise sold
Gross profit
- Business Expenses
Net profit
Basic Pricing Calculations
Retail Price - The most basic pricing formula is the
one for calculating retail price when given cost
and dollar markup.
Retail Price (RP) = Cost (C) + Markup (MU)
Cost (C) = Retail Price (RP) – Markup (MU)
Markup (MU) = Retail Price (RP) – Cost (C)
Keystone Pricing
A common pricing
method used by
– Retail price is calculated
by doubling the cost of
the merchandise.
 cost = $25.00
 retail price = $50.00
The most common type of price change
Used as a tool to stimulate sales, dispose of slow
moving products, meet competitor’s prices, and/or
increase customer traffic
Markdowns are expressed as a % of net sales.
MARKDOWN ($MD) / Net Sales (NS)
MD% cannot be calculated until goods are sold
because they are based on net sales.
MD % is usually calculated for a specific period of time
rather than on individual items.
Reasons for Markdowns
Buying errors - At times retailers make mistakes when estimating
demand for certain products and product features. For example,
selecting the wrong styles, color, sizes, materials, and/or quantities.
Pricing errors - Because pricing is an inexact science, the initial
selling price may have been set too high, leading customers to a lower
priced competitor or making them reluctant to purchase the product at
Special sales - At times, regular stock items may be marked down for
a special sales event or specific items may be purchased for the
purpose of selling them at promotional prices.
Broken assortments - Some products (floor covering, china/crystal,
material, etc) are reduced to encourage sales when part of the product
has been previously sold. Due to dye lots, discontinued patterns,
incomplete sets, seasonality, etc. these products may have to be
reduced in order to move them off of the sales floor.
Discounts Given to Resellers by
Quantity Discounts
Trade Discounts
Cash Discounts
Quantity Discounts
Reductions in price given by
manufacturers/wholesalers when a large or
specified quantity is purchased.
Cumulative quantity discounts: Based on total purchases over a
specified period of time. For example, an office supply wholesaler
may offer a 10% discount if purchases total at least $5,000 during a
six-month period, or 15% if purchases total at least $10,000 for the
same period.
Non-cumulative quantity discounts: Given to buyers for a quantity
purchase on a single order. For example, the office supply
wholesaler may offer a 5% discount if a business purchases 1-15
boxes of envelopes or a 10% discount if 16-30 boxes are purchased.
Trade Discounts
Also called functional discounts
Offered to channel members for performing certain
functions like storing or record keeping
Can be stated as a percentage off the list price or as a
series of percentages off the list price. Example: “List
price less 45%” or “List price less 30%, less 15%, less
5% ($2000 less 30/12/5).” When stated as a series of
discounts, the discounts are not added together; rather
they are calculated separately with each succeeding
discount based on the previous price.
Cash Discounts
•Ordinary Dating
•Advanced Dating
•End-of-month Dating
•Extra Dating
offered to buyers as
an incentive for
paying the invoice
amount within a
specified number of
Cash Discounts
Ordinary dating
– based on the date
of the invoice
– 2/10, net/30
buyer receives a 2%
discount if the invoice
is paid within 10 days,
or the full (net) amount
is due in 30 days
Advanced dating
– indicates that the
payout period does not
begin until the date
indicated in the terms
– 5/10, net/30, June 15
buyer receives a 5% discount
if the invoice is paid within 10
days of June 15, or the full
amount is due 30 days from
June 15
Cash Discounts
End-of-month dating
– The payout period does
not begin until the last
day of the month in
which the invoice is
– 2/10, net/30, EOM
2% discount if the invoice
is paid within 10 days of
the last day of the month
of the invoice, or the full
(net) amount is due 30
days from the last day of
the month.
Receipt-of-Goods dating
– The payout period
does not begin until the
buyer receives the
goods from the seller.
2/10, net/30, ROG
2% discount if the
invoice is paid within 10
days of receiving the
goods, or the full (net)
amount is due 30 days
from when the goods
are received
Cash Discounts
Extra dating
– The buyer has additional
days in which to pay and
still receive the cash
– 3/10, 60X, net 90
a 3% discount if the
invoice is paid within 10
days plus 60 days from
the invoice date, or the full
(net) amount is due in 90