Consumer Goods Pricing

April 13, 2006

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Consumer goods experts suggest the estimated cost of goods should be no more than 15 percent of the suggested retail price because:

margins of 55 percent to 65 percent are suggested for gross profit to cover:
- overhead
- marketing spending support (e.g., 10 percent to 20 percent of sales)
- broker commissions (e.g., 5 percent to 10 percent of net sales)
- your own company profits
a 30 percent margin for distributors who sell to retail stores
a 30 percent to 40 percent margin for retailers on retail prices

For example, on a 32-ounce bottle of shampoo selling at $2.99 retail, the math would look like this:

$2.99 x 15% = $0.4485 cost of goods per unit

$0.4485 = 35.5% of company factory price (company has 64.5 percent gross margin)

$0.4485 / 35.5% = $1.256/unit factory price

$1.256 / 70% (reciprocal of 30 percent distributor margin) = $1.794/unit for distributor price to retailers

$1.794 / 60% (reciprocal of 40 percent retailer margin) = $2.99 retail price

Pricing in other industries. Many other industries, such as restaurants, other retail establishments, and consulting services, operate on the "keystone" pricing principle:

The cost of goods is limited to 33 percent, or one-third of retail prices.
Labor and overhead is limited to another 33 percent of retail prices.
Gross profits are a minimum of 33 percent of retail prices. (Emphasis on gross! Remember that taxes, interest, and overhead expenses must be deducted before net profits are determined.)