Retail 101: Math & Financials : Chapter 1

Understanding pricing and retail math - for curious retailers, merchants, entrepreneurs and informing your shopping behaviors.

Heads up: This is going to be a different type of newsletter. For Retail 101 I’m going to get into the basics of retail. Understanding the math and financial side of the industry. I fell in love with Retail when I was studying at Syracuse University and discovered that I was 1) actually really good with numbers and financials and 2) this is an incredibly dynamic, creative and exciting industry.

My goal with Retail 101 Series will be to share the foundational parts of retail. It can be for someone looking to explore the industry more, someone who works on the creative side but wants to understand how the other operates OR for a consumer who is super curious and maybe wants to be an even more informed shopper.

Retail math is the most important part of having a successful brand, product, retailer, etc. Yes, you also need an incredible product, but if it isn’t priced appropriately everything will fall apart. Ever wonder how they come up with those prices? We are going to get into that here (and likely in additional lessons too - because let’s face it, I go into the weeds.)

For you merchants, retail math is your trusty sidekick. It helps you decipher the sales trends, figure out the best time for promotions, and ensures you're not drowning in a sea of unsold merchandise.

Let's break it down - Gross Margin, Sell-Through Rate, and Inventory Turnover – they may sound boring, but they can be oh-so-exciting. Checking your numbers can feel like you are playing Vegas odds, but if you really understand the math you can win big!

Retail Math 101: Basics, Wholesale, Retail, Sell-thru and Intro to Strategies

A. Wholesale Basics

• Wholesale is what a brand or designer sells their product for to another retailer. There are many different versions of this cost used in different formulas. First Cost (cost to make the product) or Landed Cost (cost to make the product plus Shipping & Handling to get it to the warehouse) are two examples. If you are making your product in Italy and then shipping to a warehouse in Los Angeles you need to factor in that landed cost, otherwise your calculations on profit will be totally off. Don’t forget taxes and duty fees.

• For a proper wholesale cost you need to also include all material costs as well as factory time. If you are making the product yourself, make sure you factor in your time costs to make - how do you value your time?

• Calculation: Wholesale Cost + Profit = Total Wholesale Cost

  • Wholesale Cost is the all in cost - what it costs for you to make and get your product (and possibly cost to store also if you have inventory storage overhead)

  • Profit is how much money you want to make from this item. More on that later.

B. Markup Strategies

This is the math heavy portion of Retail Math. No judgements here - use a calculator, pencil and paper, your fingers. All fine.

• What is “Markup”? Put simply, it is the additional money you make after selling your product and covering your costs to produce. It can be expressed in the dollars (how much money is made after cost is covered) or a percent (the % that dollar amount represents.)

• Keystone Markup is the golden rule of retail, and while some products have a lower or higher markup, keystone is 50% and where traditionally most Ready-to-Wear was Retailed at “back in the day.” (Yes, explaining it like that makes me feel like an old school garmento and I mean that in the most flattering way.)

• Keystone Markup where you double the Wholesale Cost to set your Retail Price. If a product costs $50 and you sell it for $100 that is a 50% Markup, or Keystone.

• Let's break it down with a quick calculation:

  • Calculation: (Retail - Cost)/Retail = Markup %

  • Example1: ($100-$50)/$100 = 50% Markup

  • Let’s switch it up, if you want a 70% Markup on a necklace, and it costs you $30 to make/produce you would retail it for: (x-$60)/x=70% In this formula, x=$200, so you Retail the necklace for $200, you have a 70% Markup and you make $140 in Markup dollars.

  • To switch it up one more way, if you know you want to sell a t-shirt for $50 and you need a Markup of 60% per a shirt to cover overhead costs (marketing, packaging, pop-up location fees etc and still make a profit of $5 per a t-shirt) you would need to find a t-shirt with a cost of $20 and it would be a 60% Markup, $30 Markup dollars per a shirt.

• Different categories have various Markups. Here are a few examples (note this is not always hard and fast. There is some flexibility.)

  • Luxury Goods - Higher Markups to cover the branding and exclusivity. They also make additional Profit to help cover additional Marketing expenses. Think fragrances and Cartier Jewelry vs Jewelry sold in a “Fine Jewelry Department” without the brand name.

  • Electronics - Typically have a lower Markup due to rapidly changing technology and the additional costs that goes into development and tooling vs what the consumer is willing to pay for the item.

  • Consumables (think Groceries) - Often have a very low Markup due to high demand, supply and price sensitivity and staying competitive.

  • Furniture - Higher Markups to cover the high cost of storage, shipping, and larger size needed to display and taking up more square footage.

  • Apparel and Accessories - Typically at Keystone or Keystone and a half (also described as 2 or 2.5 markup) due to perceived value, competition and marketing costs.

• It is so important to understand your perceived value and competition here if you are going to pitch your brand/product to a Retailer. Knowing the value of your products vs the others it would sit near or what else is available. Do your research and be honest with the quality of your own products here.

C. Retail Price tip

• My biggest recommendation is to always calculate your Retail Price to assume you might need to one day sell Wholesale even if you plan to be Direct to Consumer. You don’t want to launch with a lower Retail Price on your own channels (ex your own ecommerce site like Shopify) and then not be able to Wholesale your item to other Retailers at an appropriate cost to make a profit. You would likely need the additional margin to help cover extra marketing costs too.

D. Sell-Through Rates

• The sell-through rate in retail refers to the percentage of inventory that is sold within a specific time frame, usually measured against the initial quantity of items available for sale (or the amount at the beginning of whatever time period you are calculating.) It helps retailers understand how efficiently they are moving products off the (real or virtual) shelves. For instance, if a store initially stocked 100 items and sold 80 of them within a month, the sell-through rate would be 80%. This metric is crucial for managing inventory levels, determining which products are popular among customers, and making informed purchasing decisions to optimize sales and minimize overstock.

• Understanding sell-thru rate also allows you to plan your inventory. If you can understand your sell-thru for an expected time period you can forecast future inventory, understand when you need to drive sales more and make sure you own enough inventory during key selling periods.

• Calculation: Sell-Through Rate (%) = (Number of Items Sold / Initial Inventory Quantity) × 100

• Of course the goal is to hit 100% sell-thru on items you want to sell out of, but if you hit 100% quickly the question will of course be, could you have sold more? You will often see Retailers or Brands try and hit 70% regular price sell-thru and then clear the rest out with markdowns. Of course you look at turnover differently for replenishment (aka basics, or everyday items.) For example, intimate apparel, consumables, beauty products you aren’t trying to sell out of, but you are looking to turnover your stock at a regular rate to keep inventory fresh and not be overstocked in a single item.

E. Pricing Strategies

• When building a pricing strategy there are many factors you want to consider. Not everything has to be built around keystone margin and “set it and forget it.”

• It is important to know the competition, understand where your value proposition is to other products and also price accordingly there. Whether you are going direct to consumer or selling to a Retailer who is viewing pricing across the board. For example, if you are a shoe brand and have a black ballet flat, how does yours compare to the competition. Material, branding, exclusivity, etc.

• By ordering more product you might be able to take advantage of scale and drive the price down. If this is the case but the product is still perceived to be a higher value you can play with your product mix. Keep this product at a higher margin and take a lower margin at a product that might not be able to handle a higher price point. Just make sure you can actually sell that product at the higher price point. Otherwise you will be stuck with a pricing strategy that might not succeed.

• If your cost is too high for what the perceived value is, are you able to bring the costs down? Perhaps you are “over designing” a product or not working with a factory that is an expert or well versed in that space.

• Doing customer/brand insights can be really helpful here. Finding out what is missing in the market, what price points are ideal, what the consumer is willing to pay and what they think they would get for that price point (ex free shipping.)

Retail Math requires an old school calculator you can use without looking and type super fast. Kidding, but not. IYKYK.

F. Relevant Content

• The Cut “Hanging on by a Thread” on what it actually costs to be a fashion designer. February 2024.

• Vogue “What is the Right Price for Fashion” by Emily Farra June 2020

• Shopify breaks down 14 different pricing strategies: “Rule the market: 14 Retail Pricing Strategies” 2023

G. Wrap Up and What’s Next

• In Part One we discussed Wholesale Basics, Markup Strategies, Sell-Through Rates, Pricing Strategies with some tips and articles sprinkled in.

• I’d love to hear what questions you have. I can help answer any questions or work through real world examples.

• What’s next? In Part Deux we can dig into markdowns and promotional strategies. Please also use the comments and chat for any questions. If you are on Substack we also have the DM feature now (!!) reach out directly with any questions or email me at sarahshapiro@substack.com

  

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