Keystone Pricing in Retail
Keystone pricing doesn't always make sense for every retailer.
For example, a retailer might say "the only department in our retail store that allows keystone pricing is our gift department. Because we face a lot of competition with our other product categories, the remainder of our merchandise is priced using a 40 percent markup."
Keystone essentially means that if the cost of the product is $50, then the sale price would be set at $100. This is a 50 percent Initial Markup (also known as IMU). It is also relating a 50 percent gross margin on the sale of the product. Gross margin can be related in either a percentage or a dollar amount. So in this example, the gross margin dollars are $50 and the gross margin percent is 50 percent. Keep in mind that the gross margin and IMU are always 50 percent when you are setting it at keystone.
Many products in stores today cannot be set at keystone due to the high cost of the item from the vendor versus the amount you can sell it for. For example, computers are notorious for their low margins and competitive prices.
When keystone was first introduced as a term, it actually reflected two markups. The first was from the vendor or manufacturer to the retailer and the second from the retailer to the customer. So returning to our example above, the vendor paid $25 to make the product and then sold it to the retailer for $50 and the retailer sold it to the customer for $100. It was generally accepted as the proper business practice to follow this model in the early days of retail.
In my shoe stores, keystone pricing was still a proper method to follow, but only for certain categories. Dress and casual shoes could be set at keystone, but athletic shoes rarely could. If I used keystone for those shoes, I would have been the most expensive place in town. Now, while I never wanted to be know as the cheapest place in time to shop. I equally did not want to be know as the most expensive either.
When Not to Use Keystone Pricing
Keystone pricing may not be the best policy for your retail store. There are a few scenarios to consider.
For instance, if the inventory turn of an item is low, then the higher the price and thus the gross margin, the harder it will be to sell and the longer it will sit on your shelves or in your stockroom. Remember, in retail, cash is king. So merchandise on shelves costs you more than the price you paid the vendor.
If the product is limited edition or supply is limited, keystone is too low a policy. Sell your merchandise for what the market will bear.
If you are a discounter, meaning people really only shop with you because of your deals, then a keystone policy will not work for you. People want to see low prices and big deals. Many retailers actually inflate the IMU or MSRP in order to show a bigger discount to the customer. The customer feels like they are saving 50 percent (especially an older customer who is used to keystone pricing) but the reality is they are only saving 25 percent
We all have products in our stores that are commodities, meaning they are readily available in lots of places. For example, if you sell gum at the cash register, a retailer can't logically charge more than what everyone else in town charges for gum. So keystone pricing would not work.
But the bottom line is that th best place to start is at keystone whenever possible. Most of your vendors know this to be true and they try to control their wholesale prices to accommodate. However, descanters like Walmart have made this practice hard. As we see retailers like Target and Walmart increase their OEM lines, we will see an ease on the pressure of keystone pricing on brand name goods.