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When product life cycles were long, customer expectations low, manufacturers were dominant, and supplier agreements long lasting, then prices were stable and could be fixed for a long duration. Often prices were only changed once or twice per year and the term "the list price" entered the vocabulary.
Prices were set by reference to material and manufacturing costs to which a fixed margin was applied for the overheads (cost plus) and the profit (the profit margin), sometimes expressed as a return on investment (ROI). Sometimes the same margin is applied across the whole product line irrespective of product sales volume or life cycle.
Today
this seems all too strange, but the list price was the result of the industrial
revolution, the era of mass production and the rise of national
brands. Mass production with its high volumes and fixed capital overheads
meant that both suppliers and consumers were for a long period "satisfied".
Consumers could suddenly obtain a hugh variety of quality goods at prices
way below custom products. Suppliers could set a high enough price so that
over a reasonable period, the fixed capital and variable material costs could
be covered, and once the required volume had been obtained, the profits became
substantial. National brands with their mass market advertising necessitated
consistent prices across the country.
Because the industrial revolution also created significant social changes, there was less pressure to reduce prices. Initially, in the 19th and early 20th centuries it was the rise of the middle classes that swelled the numbers of affluent consumers who sought the new products. Then later in the second half of the 20th century, the rise in earnings of the working class to form a new middle classes, continued this insatiable demand for products and later services, thus maintaining high prices and good margins. In parallel to the consumer market there were similarities in the business market. For much of this period business was predominately focused on manufacturing and this was mostly undertaken entirely in-house where costs were controlled. Where services were bought-in, many were expensive due to the lack of competition, for example, the nationalised or regionalised railways for moving goods and the effective cartel of the banking industry for capital.
It
has only been in very recent times that supply has outstripped demand, leading
to a more competitive consumer and business environment and the demise of
the fixed list price. Globalisation and the shift to services with their
lower cost of entry, are but two examples leading to more consumer choice
at lower cost. In business, the requirement for more flexibility, as well
as the need for many additional services such as marketing, has led to a
significant rise in outsourcing and in turn to a very competitive supply
industry.
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