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

518 Chapter 18

Although some middlemen use the same standard markup percent on all their

products, this policy ignores the importance of fast turnover. Mass-merchandisers

know this. They put low markups on fast-selling items and higher markups on items

that sell less frequently. For example, Wal-Mart may put a small markup on fast-

selling health and beauty aids (like toothpaste or shampoo) but higher markups on

appliances and clothing. Similarly, supermarket operators put low markups on fast-

selling items like milk, eggs, and detergents. The markup on these items may be less

than half the average markup for all grocery items, but this doesn’t mean they’re

unprofitable. The store earns the small profit per unit more often.

Some markups eventually become standard in a trade. Most channel members

tend to follow a similar process—adding a certain percentage to the previous price.

But who sets price in the first place? The firm that brands a product is usually the

one that sets its basic list price. It may be a large retailer, a large wholesaler, or most

often, the producer.

Some producers just start with a cost per unit figure and add a markup—perhaps

a standard markup—to obtain their selling price. Or they may use some rule-

of-thumb formula such as:

Selling price
Average production cost per unit 3

A producer who uses this approach might develop rules and markups related to

its own costs and objectives. Yet even the first step—selecting the appropriate cost

per unit to build on—isn’t easy. Let’s discuss several approaches to see how cost-

oriented price setting really works.

Average-Cost Pricing Is Common and Can Be Dangerous

This trade ad, targeted at
retailers, emphasizes faster
stockturn which, together with
markups, impacts the retailer’s
profitability.

Mass-merchandisers
run in fast company

Where does the
markup chain start?

Average-cost pricingmeans adding a reasonable markup to the average cost of

a product. A manager usually finds the average cost per unit by studying past

records. Dividing the total cost for the last year by all the units produced and sold