Q: I am intending to open a small gift shop and tearoom. Can you tell me how retailers calculate their retail prices with regard to VAT? Do retailers set their prices and then work backwards to figure out what figure when multiplied by 17.5% equals the desired amount? Any tips for setting prices?
Jan 14 2007
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Answered by: Philip Wilkinson Ask a question
Many start-up businesses work out a cost figure for each product and add a modest mark-up - known as cost-plus pricing. While this method is common, it is not the only way to arrive at a price. Invest serious thought into your pricing methodology at an early stage - it can pay big dividends later.
Pricing is based on three critical points:
• What your product or service will be worth to your customers - its value
• What it costs you to produce your product or provide your service
• The price your competitors charge
‘Cost-plus’ pricing is common. This is where you work out the cost of an item and add a mark-up. Typically, in a restaurant, a business is looking for around 70% gross profit. This means that if you buy something for 30p, you sell it to the customer for £1. That £1 includes VAT. In a food shop the mark up tends to be around 30 to 35% - again, including VAT. But remember to always take into careful consideration the value that customers will put on the product (what it is worth to them) and what competitors are charging.
For much more in-depth information on pricing, go through to the Business Link for London website. Click here.
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