On retail markups:
Decades ago my best friend worked in a backpacking shop – and he also had a degree in economics. He told me about “keystone” pricing, and I’ve seen it many times since.
Here’s an example:
– The manufacturer makes a pair of trail running shoes at a cost of $20, and sells to distributors for $40.
– Distributors sell to retailers for $80 wholesale.
– Stores sell those same shoes to consumers for $160 retail.
At each stage, the keystone rule-of-thumb is to double your purchase cost. “Suggested retail price” often uses this exact formula.
Obviously, the markup at each stage must cover a variety of overhead costs, including rent, salaries, and maybe returns (see below), so a 100% markup won’t always work.
But when REI routinely charges suggested retail price for all items, minus a 10% dividend, and the occasional 20% discount without dividend – they/we (coop remember?) aren’t hurting. And they especially aren’t hurt by selling REI-branded products at a slight discount vs. competitors, but cut out one or more layers of other companies’ profits.
Does everyone use this formula all the time? No, especially in cars, computers, and other highly competitive markets. But it’s a good starting point to estimate the wholesale and manufacturing cost of many consumer goods.
And wholesale contracts usually include explicit return clauses. Often it’s the manufacturer that eats most or all of the cost of returns, warranty repairs, and unsold merchandise.
My wife designed women’s clothing for several companies, and keystone pricing was the norm. She got into big arguments over button choices that differed by pennies, because the retail price had to hit a particular target after several doublings.
Hope this helps.
— Rex