Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

Price Setting in the Business World 515

Some Firms Just Use Markups

Some firms, including most retailers and wholesalers, set prices by using a

markup—a dollar amount added to the cost of products to get the selling price. For

example, suppose that a CVS drugstore buys a bottle of Pert Plus shampoo for $2.

To make a profit, the drugstore obviously must sell the shampoo for more than $2.

If it adds $1 to cover operating expenses and provide a profit, we say that the store

is marking up the item $1.

Markups, however, usually are stated as percentages rather than dollar amounts.

And this is where confusion sometimes arises. Is a markup of $1 on a cost of $2 a

markup of 50 percent? Or should the markup be figured as a percentage of the sell-

ing price—$3.00—and therefore be 33^1 ⁄ 3 percent? A clear definition is necessary.

Unless otherwise stated, markup (percent)means percentage of selling price that

is added to the cost to get the selling price. So the $1 markup on the $3.00 selling

price is a markup of 33^1 ⁄ 3 percent. Markups are related to selling price for

convenience.

There’s nothing wrong with the idea of markup on cost. However, to avoid

confusion, it’s important to state clearly which markup percent you’re using.

Managers often want to change a markup on cost to one based on selling price,

or vice versa. The calculations used to do this are simple. (See the section on

markup conversion in Appendix B on marketing arithmetic. The appendixes follow

Chapter 22.)^2

Many middlemen select a standard markup percent and then apply it to all their

products. This makes pricing easier. When you think of the large number of items

the average retailer and wholesaler carry—and the small sales volume of any one

Demand

(Chapter 18)

Pricing

objectives

(Chapter 17)

Price of other

products in the line

(Chapter 18)

Price flexibility

(Chapter 17)

Discounts and

allowances

(Chapter 17)

Legal

environment

(Chapter 17)

Cost

(Chapter 18)

Competition

(Chapter 18)

Geographic

pricing terms

(Chapter 17)

Markup chain

in channels

(Chapter 18)

Price

setting

Exhibit 18-1

Key Factors That Influence

Price Setting

Markups guide pricing

by middlemen

Markup percent is

based on selling

price—a convenient

rule

Many use a standard

markup percent