RETAIL GLOSSARY

# Initial Markup (IMU)

The difference between the cost of goods and the initial selling price, expressed as a percentage of the cost of goods.

## What is Initial Markup (IMU)?

Initial Markup (IMU) is the difference between the cost of a product and its selling price. It represents the gross profit percentage earned by the retailer. IMU is used to set initial selling prices and helps retailers determine their profit margins.
The formula to calculate IMU is

(Selling Price - Cost Price) / Cost Price * 100

IMU is an essential metric in retail pricing and merchandise planning for maximising profitability.

## How IMU works

• Setting Initial Selling Prices: When a retailer brings new products into inventory, they need to determine the appropriate selling price. The IMU is used to calculate the selling price based on the cost of the product and the desired profit margin. For example, if a retailer wants to achieve a 50% IMU on a product that costs \$50, they would set the selling price at \$75 (\$50 cost + 50% markup).

• Profit Margin Calculation: IMU helps retailers assess the profitability of their products. A higher IMU means a higher potential profit margin, while a lower IMU may lead to lower profit margins. Retailers can use IMU as a benchmark to evaluate the pricing strategy and make adjustments if necessary.

• Merchandise Planning: IMU is crucial in merchandise planning to ensure that the overall product mix achieves the desired profit goals. By considering the IMU for different products, retailers can balance their assortment to maximise profitability.

• Promotions and Markdowns: IMU is also used to plan promotions and markdowns. Retailers can temporarily reduce the selling price while still maintaining a positive margin, ensuring that the promotion remains profitable.

• Performance Evaluation: IMU is a valuable metric to assess the performance of different product categories or individual items. By analysing IMU variations over time, retailers can identify trends and take actions to improve profitability.
Overall, Initial Markup is a fundamental tool that enables retailers to set profitable selling prices, optimise merchandise assortment, and make informed pricing decisions to achieve their financial objectives.

## Pros of IMU

1. Profitability Management: IMU allows retailers to set appropriate selling prices that account for the cost of the product and desired profit margin. This ensures that products are priced to be profitable and helps retailers maintain healthy profit margins.
2. Effective Merchandise Planning: IMU is essential for merchandise planning and assortment management. By considering the IMU for different products and categories, retailers can optimise their product mix to maximise overall profitability and meet financial goals.
3. Performance Evaluation and Pricing Strategy: IMU provides retailers with a key metric for evaluating product performance. Analysing IMU variations over time helps retailers assess pricing strategies and make data-driven decisions to enhance profitability and competitiveness.

## Cons of IMU

1. Risk of Overpricing or Underpricing: If the initial markup is set too high, it may lead to overpricing, resulting in decreased sales and potential customer dissatisfaction. On the other hand, setting the markup too low can lead to underpricing, reducing profit margins and impacting the retailer's financial health.
2. Lack of Flexibility: IMU is typically determined before products are placed on the sales floor. However, market conditions and customer demand can fluctuate, making it challenging to adjust prices quickly. This lack of flexibility can lead to missed opportunities for profit optimisation.
3. Inaccurate Assumptions: Setting the initial markup relies on various assumptions about demand, customer behaviour, and competitor pricing. If these assumptions are inaccurate, the markup may not align with the market reality, affecting sales and profitability.

## FAQ

Below you will find answers to common questions
What factors should we consider when setting the initial markup for our new product line?
When setting the initial markup for a new product line, it's essential to consider several factors. First, analyse the production and procurement costs, including manufacturing, shipping, and any applicable taxes or tariffs. Next, assess the market demand and competition to determine an appropriate pricing strategy. Consider the target customer segment, product uniqueness, and perceived value. Lastly, take into account seasonal trends and any planned promotions or discounts. By combining these factors, we can establish a competitive yet profitable initial markup for our new products.
How often should we review and adjust our initial markup strategy?
Regular review and adjustment of our initial markup strategy are crucial for maintaining profitability and competitiveness. Ideally, we should conduct a comprehensive pricing review at least twice a year. However, in dynamic markets with changing customer preferences or competitive landscapes, more frequent assessments may be necessary. Utilizing sales data, customer feedback, and competitor analysis, we can identify any deviations from the desired profit margins and adjust our markup accordingly. This flexibility enables us to remain agile in the market and optimise profitability while meeting customer demands.