# Basics of Marketing - Kotler Philip

## Calculation of the price by the method of "average costs plus profit"

The simplest way of pricing is to charge a certain mark-up on the cost of goods. So, the retailer of household goods can pay the manufacturer \$ 20 for a toaster and, having paid a surcharge of 50% of the original cost, sell this toaster for \$ 30. The gross profit of the retailer will be \$ 10 in this case. If the cost of organizing the work of the store \$ 8 for each sold toaster, the seller's net profit will be equal to two dollars. (The calculation of mark-ups is described in Appendix A. Marketing arithmetic.)

 TOO LOW PRICE TOO HIGH PRICE POSSIBLE PRICE Profit at this price is impossible Cost of production Prices of competitors and prices of substitute goods Unique advantages of goods Formation of demand at this price is impossible

Fig. 63. The main considerations in setting prices

The manufacturer of a toaster, probably, too used at calculation of foam a method «average costs plus profit». If the cost of production per one toaster is \$ 16, it is possible that when the sales price was set to retailers at \$ 20, the entrepreneur made a 25% surcharge. Construction companies issue proposals for the production of works from the calculation of the full cost of the project plus an extra charge in the form of standard deductions for profit. Lawyers and other persons of free professions usually deduce a price, adding to their costs a standard mark-up. Some sellers tell buyers that they will ask for a price equal to the amount of costs plus a certain mark-up. This is how the aerospace companies calculate the price for the delivery of their goods to the state.

The margins vary widely, depending on the type of goods. Here are some of the most typical markups produced by department stores (at the initial price, not at the cost price of the goods): tobacco products - 20%, cameras - 28, books - 34, women's dresses - 41, dresses - 46, women's hats - 50 % 3. In retail grocery trade, small margins are made for coffee, canned dairy products and sugar, high - for frozen foods, jellies and some canned goods. The margins vary widely. For example, in the category of frozen food, mark-ups on the retail price can range from 13 to 53% 4. The difference in the margins reflects the differences in the value of commodity units, sales volumes, inventory turnover and the relationship between brands of brands and private brands.

Is it logical to use standard margins when assigning prices? As a rule, no. Any calculation technique that does not take into account the features of current demand and competition is unlikely to allow an optimal price. The cemetery of the retail business is crammed with the graves of merchants, who firmly adhered to their standard mark-ups, while competitors set prices at a discount.

Still, the pricing-based pricing methodology remains popular for a number of reasons. First, sellers know more about costs than about demand. By tying the price to the costs, the seller simplifies the problem of pricing. He does not have to adjust prices too often, depending on fluctuations in demand. Secondly, if this method of pricing is used by all firms in the industry, their prices are likely to be similar. Therefore, price competition is minimized. Thirdly, many consider the calculation methodology "average costs plus profits" more fair in relation to both buyers and sellers. With high demand, sellers do not cash out at the expense of buyers and at the same time have the opportunity to get a fair rate of return on invested capital.