What Is Keystone Pricing?
Definition & Examples of Keystone Pricing
Keystone pricing is a pricing method in which all merchandise is marked up by twice the wholesale cost. A retailer may initially establish keystone pricing for products in the store, and then they may later decide to markdown items that haven't sold quickly.
Keep reading for more details on what keystone pricing is and how you can use it for your business.
What Is Keystone Pricing?
The keystone pricing method marks up all merchandise by double the wholesale price—the price paid by the business to the vendor for the product. For a business that isn't sure how to price a product, keystone pricing provides an easy starting point that is likely to ensure some profit.
Keystone is a common phrase among retailers. A retailer may describe their profit margins in terms of keystone pricing, the same way they may refer to the cash register as the POS.
How Do You Calculate Keystone Pricing?
To calculate the keystone price of an item, start with the wholesale price of that item and multiply it by two.
How Does Keystone Pricing Work?
Keystone pricing is an old strategy that dates back to before everyone had computers. Calculating specific pricing and profit margins required that complicated equations were calculated by hand, and not everyone had the time (or math skills) to do that for every item. If everything was priced at the keystone, on the other hand, you could calculate "risk" from discounts or sales or offers with greater efficiency.
Margins and Markups
Margins can be expressed by both percentages and dollars. Either way, they represent the amount of money the retailer makes for every sale. The starting point for these margins is the initial markup (IMU). Markup is the difference between the cost of the product and what you sell it for (its "market price"). The initial markup is a sort of best-case scenario for what you hope to make for a product. Keystone pricing is a way of trying to ensure that this IMU earns you profit.
The Brick and Mortar Store Experience
Despite the rapidly shifting retail landscape, millennials and Gen Z shoppers still value an in-store experience to some extent. Therefore, keystone pricing still plays a role—it's the price customers have become accustomed to paying in a retail store. It's akin to tipping at a restaurant. Shoppers know there are overhead costs with brick-and-mortar stores, so they're willing to pay extra for the product, as long as the customer service experience justifies it.
Your pricing strategy should consider the potential for future discounts. Stores can rarely sell their entire inventory at full price—most need to markdown at least some products. The longer inventory sits on the shelf, the more money it costs you, both in terms of storage and opportunity cost. It's better to markdown older items. That way, you can use the cash to buy some new, fresh inventory.
Keystone pricing gives you a good starting point for your pricing. You can likely afford to markdown products from their keystone price without sacrificing all of your profits.
Limitations of Keystone Pricing
The keystone pricing equation is more rigid than businesses should be in real life. If you can get better margins, then you should mark up your prices higher than the keystone price. Modern technology allows business owners to easily calculate subtle differences in pricing.
Keystone pricing is also difficult to do in the modern retail environment, which pits brick-and-mortar retailers against online retailers. Keystone pricing has never worked with some items—consumers just expect too low of prices for keystone pricing to be competitive. As online retailers drive down cost expectations for a wider variety of products, it reduces the number of items that can be keystone priced.
- Keystone pricing is a pricing strategy in which all items are marked up by double the wholesale price.
- Keystone pricing dates back to the days before computers were commonplace—keystone pricing made it easy for retailers to calculate their margins.
- Despite the shifting retail environment, keystone pricing continues to play an important role in pricing.