INITIAL MARKUP AND GROSS MARGIN
What is Initial Markup?
Selling Price – Cost = Initial Mark Up Dollars
Initial Markup is normally expressed as a percent. The Initial Mark Up %, for the above example, based on the retail selling price, is 55% (calculated as $30 / $55). The IMU% should always be based on retail dollars, not cost dollars as some retailers and software programs too often do. After all, you own a retail store and record sales at retail. Your sales goals are expressed in retail dollars. Plus, net sales, at retail, are used as the basis for expressing account amounts from the financials (For example, what percent is your Occupancy Costs actually means what percent of your net retail sales are dedicated to Occupancy costs.). Use retail.
An initial retail price must obviously cover the cost of the item, and any selling expense associated with the item. It also must cover a portion of the store’s day to day expenses for rent, fixtures, insurance, utilities, etc., also known as overhead, as well as leave you some profit. Stated another way, Initial Markup must be enough to cover Planned Markdowns + Planned Profits + Selling and Overhead Expenses. The Selling Price covers all that plus the cost of the item.
What is Gross Margin?
Impacts on Initial Markup % and Gross Margin %
Another major impact is Markdowns. No matter what your Initial Markup is, if it isn’t great enough to cover your planned markdowns and expenses, you will give up your profit to make the sale. When an item doesn’t move, most over-worked and stressed out retailers will take the path of least resistance, and take a larger markdown and keep taking those markdowns until the offending merchandise is gone. Some will keep the poor seller, hoping for the one customer who will come in “someday” and purchase that saved item . . . if that customer ever arrives and if you can find the item when he does. If Markdowns are higher than anticipated, net sales will be lower, and therefore, gross margin, a.k.a. Maintained Margin, or just Margin, will also be less. Brand, competition, market saturation and perceived customer value also affect Gross Margin—just like Initial Markup.
The Finer Points of IMU% and Gross Margin
Markdowns do not affect IMU% after the initial price is set. The Initial Markup is what it is. However, Markdowns have a huge effect on Gross Margin %. Markdowns decrease profit. It doesn’t matter how much an item is marked up, if it must be marked down those markdowns come from your Gross Margin. Of course, the reverse is also true. When you bring in that unique item that your customers must have, you may not need to take planned markdowns. Then you get to enjoy your higher profit.
Ways to Increase IMU% and GM
Another thing we recommend is joining a Buying Group. Buying Groups have benefits for their members to save them time and money. Also, when you go to market, look for a new vendor or two to try. Generally, your customers value individuality as much as you. Give them some items to pick from that set you apart from the pack when possible.
If you feel there is little excitement for your inventory or it is developing “sameness” in appearance, try a different market. All vendors do not go to every market and by going to a new market you may be able to find just what you want. New vendors may offer a unique appearance in color, fit or style that appeals to your customers. Look for merchandise keeping with your quality line that offers a higher markup.
Using an Open-to-Buy is a great way to plan, record your actual results and then check yourself to see how you are doing as the year progresses. It can also help to prevent the high markdowns needed to clear out excess inventory.