Initial markup (IMU) is the difference between the sales price of a product and how much it cost to purchase it. It's expressed as a percentage, and the higher the percentage, the more profitable the item is.
Learn more about IMUs and how they work.
What Is IMU?
The IMU formula is used to determine the sales price retailers put on an item in a store. For example, if a retailer buys a hammer wholesale for $5, then the IMU is the measurement of how much they mark up that hammer when they sell it to customers. If the retailer set the sales price at $10, then you have a 100% IMU.
IMU needs to cover more than just the wholesale price. It needs to be enough to cover the overhead of running the business, payroll, taxes, and the other day-to-day expenses of running a business.
How Do You Calculate IMU?
To calculate IMU, subtract the unit cost from the sales price, then divide the result by the unit cost. Multiply the result by 100 to find the percentage.
How IMU Works
IMU works by ensuring that retail sales are profitable. One of the biggest mistakes retailers make is not paying more attention to IMU in their business. Retailers often have their own formulas, such as simply using the pricing from the vendor sheet or catalog. If the vendor says the cost is $50 and the retail price is $100, that's what the retailer uses. But one retail store may have a completely different cost structure than other stores and should adjust its IMU accordingly.
Some retailers use the "double plus" system, which involves using a keystone (a set formula to determine IMU), such as doubling the cost plus an extra dollar amount like $5. This method isn't always the best, though, as the math can obliterate the profit margins when the cost of a product goes up, as you can see here:
|Cost||Selling Price||IMU %|
Requirements for IMU
The goal of an IMU is to maximize your store's bottom line, not to achieve the highest possible markup. If the initial markup is too high, your sales volume will decline. If the initial markup is too low, your store will not generate enough cash flow or profit to cover its operating expenses.
If you're struggling with setting your IMUs, one of the best places to look is retail associations. These organizations collect data from their members and help you to see what margins, IMU, and turns you should be getting from your inventory. For example, a shoe retailer should be a member of the National Shoe Retailers Association, which puts out a business performance report of the stores in the association every two years. These are excellent tools for any company looking to improve their business.
There are many ways to tweak your IMUs until you get them right, but here are three tips that could help:
- Manage your IMU by category and classification in your inventory, not by a formula: For some categories, you may get a 70% IMU, and for others, it may only be 40%. You have to be careful not to position yourself in the marketplace as the "expensive" store.
- Check out new suppliers: If you carry all the same merchandise as your competitors, you should use the same (or lower) sales prices that they do. If you carry unique merchandise (meaning the same style but from a different vendor), you can take a higher initial markup on those items since you're not in competition.
- Take advantage of closeouts: Every vendor gets to the end of its season and has inventory it wants to dump. Buying closeouts allows you to get the merchandise for a discounted price from the vendor (as much as 50% less), but you can still use the same initial selling price. For example, if the shirt cost $50 and was selling for $100 when you buy it as a closeout, use the same $100 price. Or, use your marketing savvy and "mark it down" to make it a sale item—this way, you still make money because the IMU is based on your $25 closeout cost, not the original $50 cost.
- Initial markup (IMU) is the difference between the sales price of a product and its cost.
- To calculate the IMU percentage, subtract the cost from the sales price, then divide by the cost and multiply by 100.
- Some retailers use a formula to determine the IMU for all their products, but it's best to determine it by category.