What is Keystone Pricing? Everything You Need to Know

If you are a retailer or just a person who is interested in e-commerce and perhaps wants to open a business in the future, then you are most likely already familiar with some pricing strategies.

In this article we will talk about keystone pricing. This is one of the simplest and most effective strategies that can suit you, whether you already have a developed business, or you’re at the beginning of your journey. We will analyze the pros and cons, talk about how to use this strategy correctly, give examples, and compare it with other pricing strategies.

Keystone pricing is a pricing strategy in which the mark-up on goods is 100% of the wholesale value. That is, you are selling a product for twice the wholesale price. The calculation of the price of a product with such a strategy has the following form:

Keystone price = wholesale price x 2

Keystone pricing has been around for quite some time. This strategy began to be used even before the invention of computers, when there were no resources to calculate revenue, costs, and so on. All calculations were carried out manually, so keystone pricing was as convenient as possible from the point of view of mathematical calculations, as well as quite profitable from the point of view of revenue.

Let's analyze this strategy by example: let's say you are a jewelry seller. You buy earrings for $20 per pair. You will sell them for $40 – this will be your retail price. Thus, you get a margin of 100%.

So, here the profit margin of $20 is 100% of the cost price and 50% of the final retail selling price.

But do not forget that this margin will not go completely into the retail pocket. Because there will also be costs for marketing, shipping, packaging, and so on. All these costs will be included in the markup.

Let's analyze some more examples in more detail. Let's say you are the owner of an online school supplies store. You buy notebooks from the manufacturer wholesale for $1. You buy 1,000 notebooks for a total price of $1000. So you will be selling this product for $2 apiece. This will be a 100% markup: keystone pricing.

The wholesale price may depend on multiple factors, including the labor cost, the material cost, and delivery fees. Still, your price depends only on the wholesale price.

Again, the term "keystone pricing" has been around for a long time. Initially, this method reflected two margins: the first is the manufacturer's margin, and the second is the retailer's margin. Let’s say a manufacturer makes boots and spends $25 on materials. For their skills and time they spent, they make a markup of 100%, so now these boots already cost $50. The retailer buys them for $50, and also makes a markup of 100%. So the customer buys these boots for $100.

It was considered a bargain back in those times, and the strategy is still used to this day.

Like any other strategy, keystone pricing has its pros and cons:

The most important plus is simplicity. Among many other options, this one will be the easiest to implement. You will save time and nerves, because with this method, the calculations are the simplest.

You will be able to think through your strategy better and have a more accurate idea of your store's income and expenses.

The simplicity also extends to the fact that it doesn’t take much time to apply it. And this means you’ll have more time to spare for other parts of your business.

There are also some drawbacks to this pricing strategy.

One disadvantage is that this strategy cannot be applied everywhere. There are areas in which the margin is much more than 100%: pharmaceuticals, mobile phones, luxury goods, and groceries. Selling goods in these areas at a 100% markup will simply be unprofitable. There will be a big risk of burning out.

There are also industries where the margin, on the contrary, is less than 100%. In this case, your supply will exceed the demand, and it will not be profitable for you, since some of your goods will be sitting idly in the warehouse.

Keystone pricing is quite easy to use, but before applying this strategy, you need to research your market, understand what margins your competitors have, and what the average margins on the market are.

Since the keystone pricing method was created and implemented in brick-and-mortar stores, it stands to reason that traditional retailers find the most success using this strategy.

If your products bring pleasure to customers, even if they’re everyday household goods, customers will be willing to overpay — provided they really like the product.

You should also not lose sight of the fact that the price category of your products identifies your brand. If you want to establish your store as a luxury option, then you will need other pricing strategies. If your prices are low, then the buyer may associate your brand with something low-quality and cheap. So it's up to you to decide which category your brand will be in.

The effectiveness of using keystone pricing may depend not only on the type of goods, but also on the location of your store.

For example, physical stores have expenses for maintenance, delivery of goods, and so on. There is no such thing in e-commerce stores, so the goods are cheaper. So, if you have a physical store, using the keystone method makes sense, but in e-commerce this method is not always suitable. That’s because if you set the prices too high in an online store, then customers will lose the desire to order from you, since the main motivator — the low price — will disappear.

If you are a discounter, meaning people really only shop with you because of your deals, then a keystone policy will not work for you. People want to see low prices and big deals. Many retailers actually inflate the IMU or MSRP to show a bigger discount to the customer. The customer feels like they are saving 50% (especially an older customer who is used to keystone pricing), but the reality is they are only saving 25%.

Once again, keystone pricing means a 100% markup. If a wholesale product is sold for $50 apiece, then it will cost $100 at the retailer. This is a 50% initial markup (also known as IMU). It is also applying a 50% gross margin to the sale of the product.

Gross margin can be expressed as a percentage or in dollars. Therefore, in our example, the profit in dollars is $50 and the percentage of gross profit is 50%.

As you can see, keystone pricing is quite convenient, but it is not always suitable for everyone. This approach was highly effective before, but now a lot has changed, and in order to create a high-quality pricing strategy that will suit your business, you need to take into account many different factors.

When creating a pricing strategy, it is important to analyze not only your own prices, but also your competitors’ prices. Price Intelligence Software can help you with this process.

The term "keystone pricing" originated in the late 19th century. A jewelry trade magazine called Keystone faced complaints from subscribers about showing dealer costs in a publication that customers might see on jewelers' counters. In the course of the proceedings, the term "keystone pricing" arose.

Keystone wholesale means that you buy wholesale goods already with a margin of 100% and you will also sell the product with a margin of 100%. The manufacturer makes a markup and you make a markup.

The keystone markup means adding 100% to the wholesale value of the goods. This will be the market price.

The margin from keystone pricing is 50%.