Why do we pay what we pay?

The toothbrush is a silent servant.

Twice a day, if not more, it does its work of cleaning bits of food and other gunk from teeth and gums. What is that job worth?

Some people pay as little as 6 cents for a toothbrush. Others shell out $4.50 for essentially the same combination of polypropylene plastic and nylon bristles.

The cost to make both toothbrushes is just a fraction of their final sales price, so how do the companies arrive at a figure consumers ultimately pay?

"Oral B spends a lot of time and marketing effort to convince you their $2.99 toothbrush is better," said John Mothersole, a principal with the industry-practices division of Global Insight, a consulting firm. "Whether you want to believe their marketing or not is up to you."

From movie-theater popcorn to Ford Taurus sedans and thousands of products in between, pricing affects nearly every aspect of a person's life.

Pricing "can be an incredibly complex decision," said Mark Bergen, a marketing professor with the Carlson School of Management at the University of Minnesota who specializes in pricing.

"If you price way too high, nobody buys it, even if it's a great product," he said. "If you price too low, there's all this value you've tapped into and the firm doesn't get to share in it."

Finding the middle way is crucial, pricing experts said. In some cases, companies use teams of business-school graduates, computer systems and price-optimization software to help with the process. Some corner-store owners use their experience and gut instincts. Some industries — such as airlines — adjust prices minute by minute. However, there is a drawback to charging different prices for the same item. People often view it as unfair and can punish a company by going elsewhere.

While many prices reflect the cost to make the product plus some extra for a company to make a profit, quite a few items are priced through a "value added" system. That bucket of movie-theater popcorn doesn't cost anything near $5 to produce, but consumers pay that amount because many see it as part of the overall movie-going experience, pricing experts said.

"It's kind of a weird thing," said Stephen Hoch, chairman of the marketing department at the University of Pennsylvania's Wharton School. "The fact is they're selling a ticket and some people are going to go in and pay $8 and not get anything to eat. There's another group who want a different experience and they'll pay $15 (ticket price plus food)."

For most goods, however, Hoch said companies try to charge about what their competitors do.

"It's easy to set a price," the University of Minnesota's Bergen said. "It's hard to set a good price."


Retail price: 99 cents to $4.49

Discount store: As little as 6 cents

Cost to produce: A few pennies to 65 cents

How the price is set: It costs pennies to make a toothbrush in Malaysia; these usually end up at transitional housing facilities such as homeless shelters. A more mainstream toothbrush such as a higher-end unit from Colgate-Palmolive costs about 65 cents to produce. That covers raw materials, equipment, labor and other plant costs. There is a list price and a net price, which sometimes are different. Manufacturers often offer discounts or allowances to stores, ranging from about 10 percent to 15 percent.

Colgate charges about $1.76 for the brush that cost 65 cents to make. That figure reflects advertising and promotion costs. Depending on the brand and type of toothbrush, annual advertising costs can range from $6 million to $17 million. The retailer can mark up a toothbrush 28 percent to more than 40 percent. The suggested retail price for the Colgate brush is $2.49, while an Oral-B CrossAction brush goes for $4.49 or more. Forget your toothbrush while staying at a high-end hotel? You could pay even more, although housekeeping might supply one as part of customer-care efforts.

Sources: Harvard Business School case study; Start-Rite; University of Massachusetts professor Nick Schott; Boston College professor Gerald Smith

Bag of popcorn at the movies: $5

Cost of ingredients: 50 cents

How the price is set: A popcorn processor pays $6.50 for a 50-pound bag of corn and spends about $3 to clean, sort and bag the kernels. The distributor pays $10.50 for the popcorn, then marks the price up about 15 percent. Theaters pay from $12 to $32 per bag, depending on their size. For a $5 bucket of popcorn, one theater manager pays about 50 cents for supplies, including popcorn kernels (12 cents), butter (10 cents), salt (2 cents), oil (13 cents) and the paper bag it comes in (15 cents). The rest goes to the theater. But it isn't entirely profit. The revenue pays for labor, cleaning services, electricity and garbage removal. "Without the food and the profit of the food, no theater could stay in business," said Jesse Sayegh, of the National Association of Movie Theater Owners.

Sources: Keck Williams, managing director, Angelika Film Center, Dallas; Steven Landsburg, economics professor, University of Rochester


Retail price: $2.74 per pill

Average wholesale price: $2.35 a pill

Cost of production: 20 cents per pill or less

How the price is set: Rarely has there been so much debate and confusion about the cost of something so small. The retail price for Clarinex, the newest prescription allergy medicine from Schering-Plough, is $247 for a three-month supply of 90 pills. The "average wholesale price" — a widely repeated number that, like the suggested retail price of a car, is not necessarily the real price — is $211.64. All Schering-Plough says about price is that the "net direct price" is $1.88 per pill, and that doesn't include discounts or rebates to wholesalers.

You can order Clarinex on the Internet for $184.99, or $2.05 per pill. You can go to Canada and get it for less. And if your health insurance covers it, you can get a prescription filled for a copay of $25 or less.

Unlike many consumer products, the price of prescription medicines isn't fixed or even prominently displayed. Instead, prices are set through a complex system that links manufacturers, wholesalers, retail pharmacies, chain pharmacies and companies that manage pharmacy benefits and negotiate discounts.

In the end, the final price depends on who's buying: The most affluent consumers, who tend to have the best medical insurance, generally pay less; those without insurance, who tend to be less affluent or retirees, often pay the most. The company's cost of production is quite low per pill, but it is working to recoup millions of dollars spent discovering the product and years of testing and trials to gain regulatory approval and get it to market.

Source: Mick Kolassa, managing partner at Medical Marketing Economics and author of the book "Elements of Pharmaceutical Pricing"

2003 Ford Taurus LX sedan

Transaction price: $19,557 to $19,676

Sticker price: $21,075

Cost of production: $12,000

How the price is set: The price a customer typically pays reflects a discount from the auto dealer. It could go lower, depending on rebates or low-cost financing. Those incentives can change every month. Dealers don't earn a lot of money selling new cars. Instead, they make it up on service, parts, financing, insurance and used-car sales.

The sticker price can mean little, though, because dealers discount the price based on how many cars they have in inventory. The process starts with a target set by Ford based on what similar cars are going for. About 70 percent of that cost comes from labor and materials. The rest is for things like keeping the lights on at the factory, shipping the car and paying for the warranty. The remaining position — $7,557 in the case of the Taurus — is Ford's gross margin. This isn't pure profit, though, because Ford still has to use some of that to cover expenses at headquarters and elsewhere in the company.

Sources: Bob Kurilko, a vice president for Edmunds.com; Joe Cashen, director of pricing strategy for Carsdirect.com; and Eric Lawrence, editor of Blackbook/CPI Value Guide

Seattle Times file photographs