Understanding Retail Pricing

Why things cost what they cost.

 

Many people love shopping, looking for a deal, or finding that perfect item. Very few understand how retail works, or what the real cost of an item is.

Let us suppose an item is made in one country, but sold to another – here is how pricing works.

First the components must be purchased. Let us say all the components cost $1.00 total. Somebody is paid to put the components together – let say $0.50. Now the item has a value of $1.50. Now the item must be packed in Styrofoam, and boxed, we can say that costs $0.10. The manufacturer then sells the product to a wholesaler (sometimes there is more than one wholesaler, each one raising the price). The manufacturer wants to make a profit so they might double the total, from the current value of $1.60 to $3.20. It is then transported to the country where it is to be sold. If we figure the cost of shipping, and duty, to be another $0.50 the item is now worth $3.70.

The wholesaler then markets the item to retailers. Let us say they mark it up to an even $7.00. They usually set limits, not allowing retailers to buy fewer than a set number of items. They sell the items through catalogs, websites (closed to the public), gift shows, and sales representatives – all of which have costs.

The retailer orders the item, typically having to buy a minimum amount of merchandise from the supplier. They pay for shipping, which can be another 10-20% and must be recovered in the price of t the item. The retailer also has to cover employee expenses, rent, electricity, and so on.

Some retailers double the price of their goods, others may triple the price. As such the item that cost $1.50 to make can be sold for $14.99, or more.

Image by doug_wertman via Flickr

By now most consumers know that ending the price in .99 or .95 or whatever is a marketing ploy.  A trick to get the consumer to think they are spending slightly less than they really are.   Many stores now have even more unusual pricing stratagies, ending the price in .58 or whatever.  Some even use the price as a code for what month the product came into their store, or to mark what type of product it is to catch tampering with price tags. 

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  1. Very interesting. I\’ve often wondered how hand-crafted items made in India or China can be sold for so little in Canadian discount stores. I make and try to sell crochet and knit items, and I know how many hours I put into making them. People who browse at my craft table know that they could buy a similar item at Walmart for much less. The person who originally crafted the item probably got a pitance for their time.

  2. Thanks for that.

    It’s good to know!

    Inna

  3. I would agree that when you buy quality items, they consume less because you know that they’ll last longer than the cheaper ones.

  4. Aw yes, a subject I know well from owning restaurants and working in retail stores. Great info B.

  5. The manufacturing cost will not be more than 40% of the Retail Price. For example if a cold drink Retail Price is $10 then the manufacturing cost is not more than $4.
    So we are paying 40% to the manufacturer and 60% for others who getting profit share. And those people are becoming very rich day by day not the consumers.

  6. I work at home in our small store when not in school.

  7. Very handy tips, Brenda, my wife will surely learn from it.

  8. An interesting tip. Of course the presence of the “middlemen” tends to influence pricing. Thanks for sharing, Brenda.

  9. All the middlemen get the profit. the actual person who produced the article ends up with the short end of the stick.

  10. I think I would want to be the middleman if he is making the money. Excellent article, thanks for sharing your working knowledge with us.

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