Retail Selling Price
The manner in which you establish your retail selling price is the essential control in determining your
net (pretax) profitability.
Pricing formulas in the home improvement business cannot be established based on generally accepted
formulas or those being used by contemporary (similar) organizations.
Pricing formulas have to be based on provable data with special techniques for examination and control.
This requires the use of a sales and marketing model and interim operating statements.
The components of a proper pricing method require some adjustment to conventional thinking and
practices regarding accounting principles (nothing changes G.A.A.P. for annual reporting or for Income
Tax Returns).
Suggested Components:
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Labor and material (direct costs) to complete the home improvement contract
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No adjustments for warehouse or supervisory personnel
May contain mark-up to actual cost of product
No allocations for service or repair
“Permit” cost included / possibly made recoverable
Sales Costs:
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Commissions
Sales training and supervision
Sales support costs
Promotion and T & E (travel & entertainment) related expenses (incentives, contests,
dinners, trips
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Marketing Costs:
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All advertising / lead getting costs
Production costs, displays
Demonstrators (malls, exhibits, shows)
S. F. I. charges or licensing fees
Management and administration costs relative to marketing
Costs and/or depreciation of special equipment and software
General and Administrative ( G & A) Costs
 Other expenses (costs) for running the business
 Allocated cost if owner is also G.M. and draws salary over $150,000 (Example: In an “S”
corporation the owner draws $250,000 - as G.M. - treat $100,000 as salary, $50,000 as a
draw against anticipated earnings - $100,000 as a draw against net profit). This will stabilize
G & A for purposes of formula.
 One time charges and special or non-recurring income becomes an adjustment after net
profit is calculated (not listed within G & A).
How to Determine Your Retail Price:
Retail pricing has to be based on actual expenses within an individual company. First, examine your
operating costs, allowing a reasonable salary or salaries for owner/management. Owners frequently
"draw" their income as cash is available; however, for budget purposes, establish an actual amount
(similar to what would be paid to a G. M. - Ex: $150M). Then, make a list of percentages based on your
actual expenses.
Example:
Sales Costs
(Includes sales mgmt. & overwrite bonuses)
Marketing Costs (fully loaded)
G & A Operating Expenses (overhead)
Anticipated Net Profit
TOTAL
13%
15%
20%
10%
58%
Subtract the total above (58%) from 100%; the difference is 42%, which will represent the total labor
and material (by percentage) within your selling price.
To create a retail price for an individual product (example, a replacement window including wrap to
frame), apply this formula:
Example A:
Cost of window (incl. shipping)
Trim and Miscellaneous
Labor to install (incl. re-measure)
(Direct Cost) Total labor & material =
$150.00
$ 15.00
$ 70.00
$235.00 = (42%)
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Next divide 42% into $235 =
$235 ÷.42 = $560.00
The net selling price of the window less any discounts used to produce the sale would be $560.00 based
on these projections.
Inducing G.O.K. factors: If you warehouse, or have developed and paid for handling equipment, special
samples, or similar issues you would adjust this formula as follows:
Example B:
Cost of window
$150.00
G.O.K. Factors (15% of cost)
$ 22.50
Total cost of window
$172.50 (Sub total)
Trim and miscellaneous
$ 15.00
Labor to install
$ 70.00
(Direct Cost) Total labor & material = $257.50 (Total)
257.50 ÷ 42 = net selling price =
$613.00
To create an allowable discount of 10%, use this formula
Example A:
Selling price 560 ÷ 9 = (62.20) X 10 = $622.00
Example B:
Selling price 613 ÷ 9 = (68.10) X 10 = $681.00
Pricing Formula Worksheet:
List actual cost(s) in each of the below categories by their percentage against revenues from
your first annual (or most recent) operating statement (P & L).
Total Sales Costs .......................................... _______%
Total Marketing Costs .................................. _______%
General & Administrative Costs .................... _______%
Projected Net Profit ...................................... _______%
Total (%) of Above Categories ..................... _______% (A) = Gross Margin
Necessary
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The percentage of above costs plus projected net profit equals (A) when subtracted from 100%
reflects in the remainder (B), the percentage that your labor and material represents to your
net retail selling price.
Subtract (A) % from 100% = _______% (B) = Direct Costs
------------------------------------------------------------Next use actual costs
The cost of the replacement window
including freight and taxes is
$____________
Trim and Misc. (caulking, etc.) is
$ ____________
Labor and Installation
(Including re-measure) is
$ ____________
Total Labor & Material is
(C)$ ____________ = (B) ________%
Copyright © 2014 Dave Yoho Associates. All Rights Reserved.