Welcome to  Part II of a three-part blog about pricing.
To read the fascinating Part I, please refer to our June 20, 2011 blog post.

The scenario:

Meet Janice and Skippy, our ‘typical retailers.’  They will purchase a widget from their wholesaler for, say, $50.  Their initial markup for goods is 100%, giving them a 50% initial margin.  Let us say that they sell 1,000 of these widgets a year, but 10% of them are sold at 10% off each year.

(900 x 100) + (100 x 90) = 99,000 total revenue

Since cost of goods (COGS) was $50,000, their maintained margin is now 49.49% ((49,000/99,000)*100)).

OK. So Janice and Skippy have a physical store — computers, employees, a marketing budget, extra strength Tylenol and all the other expenses that come along with being entrepreneurs. They are good business people so they know that their expenses must not out-strip their revenue. And they have worked it out so that their costs of running the shop, including their own salaries which amount to 46% of total sales.

At the end of the year, they have 3.49% (49.49 – 46) of sales to distribute to themselves as an owner draw.  Three percent might seem like very little, but you can trust that most mom and pop shops in the US don’t even manage that. Their 3.49% amounts to $3460 cash in their pocket at the end of the year.

What happens when Janice and Skippy raise their price by 5%?

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