What is IMU in Retail?

Setting the right initial price determines your profit.

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Here is a topic that fascinates me when talking to retailers whether they are new to the business or had their store for years. There is a lot of money left on the table with IMU and the more you understand it, the more of that money you can put in your pocket. 

IMU stands for Initial MarkUp. It is the calculation used to determine the selling price you will put on an item in your store. For example, if you have a hammer that costs you $5, then the IMU is the measurement of how much you mark up that hammer when you put it on the shelf. So, if you set the selling price at $10, then you have a 100% IMU. 

One of the biggest mistakes retailers make is not paying more attention to IMU in their business. I hear all kinds of "formulas" used by various retailers. For many, they simply use the pricing from the vendor sheet or catalogue. If the vendor says the cost is $50 and the Retail Price is $100, then that is what the retailer uses. But one important thing to note here, that vendor sheet is pricing for the country - for everyone. And your store may have a completely different cost structure than others. In Manhattan, for example, rents typically run 4 to 5 times that of Dallas. So, if you have the same merchandise in the Manhattan store and the Dallas store at the same price and same IMU (from the vendor) which store will be here next year and which one will not?

I have had many retailers tell me they use the "double plus" system. This is when you use keystone (or 50% as the IMU PLUS an extra dollar amount like $5. They think they have stumbled onto greatness, but here is where that greatness fails. Watch how the math changes as the cost of the product goes up:

Cost Selling Price IMU %
$10 $25 60%
$20 $45 56%
$40 $85 53%
$80 $165 52%
$100 $205 51%

So, this "wonderful" idea of adding $5 to the selling price to account for sales, etc actually works against you. The higher the cost of the item, the less IMU (and thus less gross margin) you get from the product. 

Setting your IMU is sometimes more of an art than a science  But the goal is not to achieve the highest possible markup, but to maximize your store’s bottom line.  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 are struggling with setting your IMU, one of the best places to look is state or retail associations. These organizations collect data from their members and help you to see what margins, IMU and turns you should be getting from you inventory. When I owned my shoe stores, we were members of the National Shoe Retailers Association. Every two years, the association put out a business performance report of the stores in the association. This was a great tool for me as I get a benchmark to measure my business against.

Here are 3 Tips to Help You Set IMU

  1. Manage your IMU by category and classification in your inventory, not by a formula like the example above. For some categories, you may get a 70% IMU for others it may only be 40%. You have to be careful not to position yourself in the marketplace as the "expensive" store. 
  2. Check out new suppliers.  If you carry all the same merchandise as your competitors, you must use the same selling prices they do as well.  If you carry unique merchandise (meaning same style different vendor), you can take a higher initial markup on those items since you are not in competition. 
  3. Use closeouts. Every vendor gets to the end of its season and has inventory they want 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. Then use your marketing savvy and "mark it down" to make it a sale item. But you still make money because the IMU this time is based on your $25 closeout cost, not the original $50 cost.