Basic Merchandising Mathematics
(Section 1, Part 2)
This addresses the basic retail math price components and how they are utilized in calculating basic markup, individual markup, average markup, cumulative markup, initial markup, and maintained markup.
We recommend printing off the course content reference guide to assist you in the How to Think Like a Buyer courses.
Retailing is all the business activities involved in planning and procuring goods and services from vendors and pricing, positioning, presenting, packaging, promoting, and ultimately selling those goods to the target consumer.
Merchandising is all the business activities involved in planning, creating, distributing, and marketing merchandise assortments and classifications to the target consumer while reflecting the company image. There are different types of merchandising based on which link or level (i.e., fiber, textile, apparel/home furnishings companies, retail stores) in the supply chain the merchandising is housed.
Basic Retail Pricing Components
The formula for calculating retail price when wholesale cost and markup are known is as follows:
Retail $ = Cost $ + Markup $
Individual Markup & Gross Markup
Steps for calculating markup percentage on group of items with varying wholesale costs and retail prices:
- Step 1. Calculate the retail price for each of the items.
- Step 2. Calculate total retail on all items.
- Step 3. Calculate total cost of all items.
- Step 4. Calculate overall total cost and overall total retail.
- Step 5. Calculate total markup dollars.
- Step 6. Calculate markup percentage for the total order.
Every retailer must establish the desired markup goal for each product category or department within the store, and for the store itself, in order to meet the markup percent goal established by store management. (Remember, markup must cover expenses, reductions, and profit in order for the store to remain in business.) Specifically, the markup on merchandise that is already in the inventory or on order must be combined with the markup on purchases that are to be made throughout the selling season. Some markups are below the set markup goal, while others are above the established markup goal.
Cumulative markup is an average markup at any given period of time (e.g., month, quarter, season, and six-month period) during a retail year. It is an aggregate markup on merchandise with varying markups. Buyers purchase goods for the beginning of a new selling season; and, then throughout that season, they purchase goods to be delivered in order to replenish inventory that has sold or been marked down. Or, throughout the season, they may purchase a product that is needed for special promotions or sales.
The difference between the original retail price and cost is the initial markup. Retailers do not expect to sell all merchandise at the initial markup. Many items have to be marked down to meet customer expectations, create sales volume, or clear inventory. Others will be discounted due to customer returns and allowance and/or employee discounts. And, the retailer always has to plan for inventory shortage or shrinkage due to both employee and customer pilferage.
Maintained Markup is the markup on the merchandise that is sold to the consumer, or the difference between the cost of goods and the actual retail price of the goods when sold. It is based on actual sales, not planned sales, and actual happenings such as markdowns in the retail store. In other words, it is not the “hoped for” planned initial markup. It is the markup that relates the wholesale cost of goods and other costs charged by the vendor as well as the costs of handling of goods to the profitability of the store.