Pricing your product: How can a shirt cost $180? Or, how does keystone pricing work?

Have you ever walked into a store, looked at a pair of shoes, and wondered “How can this pair of shoes cost $120?” The answer, in many cases, is “Keystone pricing”, which is described here:

Keystone Pricing in Retail

It states:

“When keystone was first introduced as a term, it actually reflected two markups. The first was from the vendor or manufacturer to the retailer and the second from the retailer to the customer.

So returning to our example above, the vendor paid $25 to make the product and then sold it to the retailer for $50 and the retailer sold it to the customer for $100. It was generally accepted as the proper business practice to follow this model in the early days of retail.”

If it costs $25 to make the shoes and put them in a box ready to ship, then when you look at the shoes at Dick’s, Foot Locker or Bass Pro Shop, a $100 price is “normal” because of keystone pricing.

The wedge that Amazon used when it got into its original book business in the 1990s was its willingness to cut the second part of Keystone pricing in half. So if a book had a list price of $20, Amazon would buy the book for $10 and sell it for $15 instead of $20. A brick-and-mortar store could not afford to do this, but Amazon could.

These three articles are interesting. Here, a fashion entrepreneur is explaining her prices to her customers:

A fashion designer breaks down why some clothes are worth spending more on

It links to:

How Fashion Brands Set Prices

Here is her original article:

MONEY TALK

The articles provide a nice breakdown on why a particular shirt costs $180, and how manufacturers and retailers work together to create this price.

This leads to another thing you might hear about pricing physical products, which goes something like this: If you add a component to a physical product that costs $1, then the final price of the product may go up anywhere from $6 to $10. This is why you see manufacturers working very hard to keep component pricing down, and reducing components. If the case can be held on adequately with three screws instead of five, this will have a material impact on the final price in the store.

 

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