Read Peter Drucker, Case #3, “What is a Growth Company” in Management as a Liberal Art: A Selection of Readings, pages 75-76.
Many American and European firms set the price of a new product as the sum of the costs and the desired profit. This is known as Cost Plus Pricing. The rationale is that the company must earn sufficient revenues to cover all costs and yield a product. Peter Drucker writes: “This is true but irrelevant: Customers do not see it as their job to ensure manufacturers a profit. The only way to price is to start out with what the market is willing to pay.”
In Case #3, you will read about a company of bread and cakes that was bought by a large, publicly traded, private equity firm. How does Cost Plus Pricing figure into the issues that this bread and cake company faced? How can we put Drucker’s principle to work here?
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