Rules of Thumb in Pricing and Profitability

September 1996
by Gene Schwartz

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]). With cost of sales going up (postage, etc.), they need to drive
down the 33% cost of product. Remember also that they are buying
nonreturnable product from you or their printer, so they have to add the cost
of unsold or remaindered books (as do you).Multipliers of Product Cost Rules

The Three times Formula also shows up hidden in pricing formulas. I always
counsel that your core sales have to net you at least 3 x cost of product.
See how this works using the standard manufacturing multiples of say 6 x mfg
in the college market (25% discount), and 8 x mfg in the trade market (45%
discount). Your $2 pp&b college reader priced at $12 returns $9.00, or about
4.5 x. Your $2 trade pp&b trade paperback priced at $16 returns $8.80. 3 x
pp&b is $6, so you have $3 (or $2.80) to spare. Now add in the cost of
shipping, royalties, and recovery of prepub costs, and that $2.80 to $3 goes
rapidly. Now we’re back to 3 x to cover marketing and distribution, overhead,
and profit.

The question often comes up about how to price premium and bulk sales. If
these are incremental to your core market, you can use 2.5 – 3 x pp&b only,
and everything less the author’s share drops down to the bottom line
bypassing any other distribution or overhead expense.

Using the standard multiples of manufacturing cost as a yardstick to
profitability assumes that your marketing costs and discounts are “average.”
The 8 x multiplier works in trade if your marketing ratio is 33%. If you are
paying 30%…IBPA Members – Click here to view the full article (login required).

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