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

516 Chapter 18

item—this approach may make sense. Spending the time to find the best price to

charge on every item in stock (day to day or week to week) might not pay.

Moreover, different companies in the same line of business often use the same

markup percent. There is a reason for this: Their operating expenses are usually sim-

ilar. So a standard markup is acceptable as long as it’s large enough to cover the

firm’s operating expenses and provide a reasonable profit.

How does a manager decide on a standard markup in the first place? A standard

markup is often set close to the firm’s gross margin.Managers regularly see gross mar-

gins on their operating (profit and loss) statements. The gross margin is the amount

left—after subtracting the cost of sales (cost of goods sold) from net sales—to cover

the expenses of selling products and operating the business. (See Appendix B on

marketing arithmetic if you are unfamiliar with these ideas.) Our CVS manager

knows that there won’t be any profit if the gross margin is not large enough. For

this reason, CVS might accept a markup percent on Pert Plus shampoo that is close

to the store’s usual gross margin percent.

Smart producers pay attention to the gross margins and standard markups of mid-

dlemen in their channel. They usually allow trade (functional) discounts similar to

the standard markups these middlemen expect.

Different firms in a channel often use

different markups. A markup chain—the

sequence of markups firms use at differ-

ent levels in a channel—determines the

price structure in the whole channel. The

markup is figured on the selling priceat

each level of the channel.

For example, Black & Decker’s selling

price for an electric drill becomes the

cost the Ace Hardware wholesaler pays.

The wholesaler’s selling price becomes

the hardware retailer’s cost. And this cost

plus a retail markup becomes the retail selling price. Each markup should cover the

costs of running the business and leave a profit.

Specialized products that rely on
selective distribution and sell in
smaller volume usually offer
retailers higher markups, in part
to offset the retailer’s higher
carrying costs and marketing
expenses.

Markups are related to
gross margins

Markup chain may be
used in channel pricing