Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Price Setting in the
Business World
Text © The McGraw−Hill
Companies, 2002514 Chapter 18
Even with its lower costs,Wal-Mart isn’t content to take
the convenient route to price
setting by just adding a stan-
dard percentage markup on
different items. The company
was one of the first retailers to
give managers in every depart-
ment in every store frequent,
detailed information about
what is selling and what isn’t.
They drop items that are col-
lecting dust and roll back
prices on the ones with the
fastest turnover and highest
margins. That not only
increases stockturn but also
puts the effort behind products
with the most potential. For
example, every department
manager in every Wal-Mart
store has a list of special VPIs
(volume producing items).
They give VPIs special atten-tion and display space—to get
a bigger sales and profit boost.
For instance, Wal-Mart’s analy-
sis of checkout-scanner sales
data revealed that parentsoften pick up more than one
kid’s video at a time. So now
they are certain that special
displays feature several videos
and that the rest of the selec-tion is close by.
Wal-Mart was the first major
retailer to move to online sell-
ing (www.walmart.com). Itsonline sales still account for
only a small percent of its total
sales, so there’s lots of room
to grow there too. Further,
Wal-Mart is aggressively tak-ing its low-price approach to
other countries—ranging from
Mexico to China.
To return to where we
started, Kmart is now copyingmany of Wal-Mart’s innova-
tions. However, Wal-Mart has
such advantages on sales vol-
ume, unit costs, and margins
that it will be difficult for Kmartto win in any price war—
unless Wal-Mart somehow
stumbles because of its
enormous size.^1Price Setting Is a Key Strategy Decision
In the last chapter, we discussed the idea that pricing objectives and policies
should guide pricing decisions. We accepted the idea of a list price and went on to
discuss variations from list and how they combine to impact customer value. Now
we’ll see how the basic list price is set in the first place—based on information about
costs, demand, and profit margins. See Exhibit 18-1.
Many firms set a price by just adding a standard markup to the average cost of
the products they sell. But this is changing. More managers are realizing that they
should set prices by evaluating the effect of a price decision not only on profit mar-
gin for a given item but also on demand and therefore on sales volume, costs, and
total profit. In Wal-Mart’s very competitive markets, this approach often leads to
low prices that increase profits andat the same time reduce customers’ costs. For
other firms in different market situations, careful price setting leads to a premium
price for a marketing mix that offers customers unique benefits and value. But these
firms commonly focus on setting prices that earn attractive profits—as part of an
overall marketing strategy that satisfies customers’ needs.
There are many ways to set list prices. But for simplicity they can be reduced to
two basic approaches: cost-orientedand demand-orientedprice setting. We will discuss
cost-oriented approaches first because they are most common. Also, understanding
the problems of relying only on a cost-oriented approach shows why a marketing
manager must also consider demand to make good Price decisions. Let’s begin by
looking at how most retailers and wholesalers set cost-oriented prices.