Most distributors are accustomed to taking whatever Retail Price the vendor sends out and using that as their Retail Price. However, that’s not always the best option. Years ago, one of the major vendors sent out a price update where they lowered the Suggested Retail Price and raised the price the distributor paid (the cost). Obviously this was not good for the distributor.
What’s the best course of action? In this situation, one option is to let the software, for our customers that would be CylTech 2, determine the retail selling price based on the desired gross margins. Within CylTech 2, there’s a program that will help you automatically calculate the selling price based on the desired gross margins.
What does this look like? The first option, Cost Plus Percent of Cost, looks at the cost and takes a percentage of your cost and adds that to the cost to calculate the Suggested Retail Price. In this example, if you wanted a 25% gross margin and your cost was $100.00, the program would calculate 25% as $25.00 and add that to the cost giving you a selling price of $125.
If, on the other hand, you want your Suggested Retail Price to be a Percentage of Retail, then the selling price would be different. To generate a 25% margin, based on the retail selling price, the Suggested Retail Price would need to be approximately $133.
The formula would be: Margin = 100 * (revenue - costs) / revenue
If you're using our software, then there is a clear example of each method when you enter the program to set up your pricing percentages.
What to remember: It's important to know exactly what you mean when you talk about gross margin percentages. In one example above, your gross margin dollars are $25. In the other example, your gross margin is $33. Both refer to a gross margin of 25%, but it is all in how you say it and what you mean.
Have questions? Let us know by sending us an email