Advertising expenses, operating expenses, and other types of expenses are quoted in the same way. If selling costs are 8 per cent, this means that for each USD 100,000 in net sales, the cost of selling the merchandise is USD 8,000. For instance, selling expenses are expressed as a percentage of sales. One is that many other ratios are expressed as a percentage of sales. There are several reasons why expressing mark-up as a percentage of selling price is preferred to expressing it as a percentage of cost. In this example, the mark-up is 74 per cent of cost (USD 3.40/USD 4.60) or 42.5 per cent of the retail price (USD 3.40/USD 8).
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The mark-up may be designated as a per cent of selling price 0r as a per cent of cost of the merchandise. For example, a man’s tie costs USD 4.60 and is sold for USD 8. The difference may be expressed in dollars or as a percentage. When middlemen use the term mark-up, they are referring to the difference between the average cost and price of all merchandise in stock, for a particular department, or for an individual item. Finally, a company’s costs may fluctuate so constant price changing is not a viable strategy. Another disadvantage is that it does not take into account consumers’ perceptions of a product’s value. For example, department stores have often found difficulty in meeting competition from discount stores, catalog retailers, or furniture warehouses because of their commitment to cost-plus pricing. Likewise, the marketer is sure that costs are covered.Ī major disadvantage of cost-plus pricing is its inherent inflexibility. Consumers may also view this method as fair, since the price they pay is related to the cost of producing the item. If sales volume projections are reasonably accurate, profits will be on target. That means that one product may have a goal of 48 per cent gross margin while another has a target of 33.5 per cent or 2 per cent.Ī primary reason that the cost-plus method is attractive to marketers is that they do not have to forecast general business conditions or customer demand. The per cent selected varies among types of merchandise. This gross margin is designated by a per cent of net sales. Gross margin is the difference between how much the goods cost and the actual price for which it sells. The manager selects as a goal a particular gross margin that will produce a desirable profit level. The cost-plus method, sometimes called gross margin pricing, is perhaps most widely used by marketers to set price. Cost-oriented pricing: cost-plus and mark-ups For purposes of discussion, we categorize the alternative approaches to determining price as follows: (a) cost-oriented pricing (b) demand-oriented pricing and (c) value-based approaches. However, while many marketers are aware that they should consider these factors, pricing remains somewhat of an art. Price determination decisions can be based on a number of factors, including cost, demand, competition, value, or some combination of factors. Understand the alternative pricing approaches available to the manager.Īlternative approaches to determining price.The objectives of this section is to help students …