IMU, or initial markup, can make or break you as a retailer. Your survival depends on the difference between the price you pay a vendor for merchandise and what you charge customers. That difference represents your IMU -- and your profit. However, the amount you add to your wholesale cost -- the IMU -- must bring in enough cash to cover your expenses and keep you competitive, yet leave something on the table. Setting prices is an art that, done well, adds to your bottom line.


IMU has three components: operating expenses, anticipated markdowns and desired profit. Operating expenses -- utilities, payroll, supplies, insurance and other costs such as marketing and shrinkage, or loss from theft or damage -- make up your overhead and are expressed as a percent of sales. For example, $25,000 in expenses on a sales plan of $250,000 puts your overhead at 10 percent. By factoring any decreased revenues from markdowns into your pricing, the second IMU component, you can avoid selling at a loss. The third aspect of IMF, profit margin, stems from your business plan.


Think of your IMU as a percent of the price you ask customers to pay: the retail price. To calculate IMU, add these percentage figures, then divide the total by the markdown percent plus 100: operating, desired profit margin and markdown. Using this formula, your initial markup should be 41 percent when overhead is 25 percent, profit margin is 7 percent and planned markdowns are 15 percent of sales. An item that cost you $6.38 would carry a retail price of $9, based on a 41 percent IMU.


The actual price you set demands more than retail math, however. The art of retail pricing requires sound judgment to prevent charging too much or too little. A retailer must consider what his competitors charge for similar or identical items and what the market will bear. When the IMU formula indicates prices that your gut feeling says are wrong, make adjustments. This may mean accepting a lower profit, reducing expenses or finding new vendors who can offer more distinctive merchandise that warrants higher markups in your market. It may also mean revising your pricing strategy.

Pricing Strategy

Your pricing strategy supports your marketing plan. If you target the luxury goods market, for example, you will lose credibility in the eyes of your customers if your prices shout “bargain basement.” Traffic-building tactics also come into play when setting prices. You may price an item as a loss leader to attract shoppers, which means your IMU doesn’t apply. Or you may opt to offer customer-pleasing merchandise that keeps you competitive in spite of implementing a higher-than-average IMU.

When considering your initial markup, remember that most people regard retail price in terms of perceived value. If you value your service and price accordingly, your customers will sense your confidence and find value too.