Manufacturers are finicky about the price at which their products are sold in the market. This is why they recommend or suggest prices to retailers to sell their product at a certain price. This price is known as manufacturer’s suggested retail price or MSRP.
Often you will find the MSRP listed on the product you pick up from the stores, on both large and small items. Retailers are not bound to sell the product at MSRP since they can sell it at lower prices ( discounts and sales) or even sell it at a higher price ( in case of shortage or high demand).
MSRP is calculated after the manufacturer takes into the account all the costs of production that went into the creating the product along with a profit margin for themselves and their distribution channel.
With MSRP, a manufacturer has to take care of everyone involved before the product reaches the consumer. This means everyone from the manufacturing process to sale cycle – an average margin for retailers is also added into the MSRP. What this means is that apart from the manufacturer, the wholesalers and retailers also make a profit if they stick with MSRP.
For instance, a television manufacturer wants to create a new model of television – they would first analyze the cost of production, then add in their profit margin. For instance if a single unit cost them $50, they can sell it at $125, giving themselves a $25 profit per unit and $50 as a markup for retailers and wholesalers, allowing them to make a profit.
MSRP is also used by manufacturer to create a premium brand –like what Apple Inc. does with iPhone. Apple Inc. announces the prices of their phones during a key note event which is then followed by retailers across the globe. This creates not only a strong impression of a quality product that is priced at $999. This helps in creating price stability, meaning no one offers discounted or cheaper prices.
Manufacturer’s Suggested Retail Price is listed on almost every retail product – you can pick up a wrapper of any product and you will find the MSRP listed on it. For some products, MSRP is always listed and followed closely like cars or expensive electronic goods. The idea is that since the price is recommended by the manufacturer. The price should be same across all the stores selling the product.
Difference between MSRP and MAP
If you know your pricing terminology, you might be wondering what is the difference between MSRP and minimum advertised pricing or MAP. These both stem from a manufacturer telling retailers about their product prices but are still different things.
As we covered MSRP, let’s talk about MAP. MAP is the basically the price that manufacturers tell retailers to advertise their products at. It’s perfectly legal since it doesn’t stop the retailers to sell it below any minimum price.
So what’s the difference between the two? If a product is priced at $50 MSRP, then the retailers can sell it at $45 or $55. What if they sell it really cheap to undercut their competition? For instance the same product is sold at $25. This would create a price war which would hurt the market, small businesses and also the manufacturer. With an MAP, manufacturer can come into a formal agreement with its retail partners to advertise the product price at a certain level. This is done to ensure no price war happens in the market.
How does MSRP help manufacturers and retailers?
Retailers are not bound by MSRP and can actually sell lower or higher than the recommended price. For instance if a retailer is new in a region, it can offer discounts on products to gain customers. In case of supplies running out, retailers can hike up the price.
Do keep in mind that there is a sizable portion for retailers as well, which allows them to enjoy flexibility in reducing or increasing the price. Manufacturers cannot legally bind retailers to MSRP. Though they do have the right to refuse selling their products to retailers if they want to. This usually happens only if the retailers pricing practices are hurting the brand equity in the market.
Increasing Prices above MSRP
Since MSRP contains a markup for retailers, they don’t usually need to increase the prices. This however doesn’t mean that they are not going to. To maximize profits, they can decide to hike up the price. Especially in cases when they know that the product is in high demand.
When they do this, the Manufacturer’s Suggested Retail Price is not advertised and new prices are used in advertising. This is where MAP comes into play, because manufacturers don’t want their products being sold at an incredibly high price.
Generally it is not wise to promote prices higher than MSRP, since not all retailers do it. Most of the time MSRP is widely promoted. This means that the buyers would know that they are paying a higher price and can go to the retailer’s competitors.
For instance, if the MSRP of a laptop is set at $1200 but a retailer is selling it at $1500, the consumers would know since other retailers might be selling it at $1200 or maybe even lower.
Pricing products below MSRP
In eCommerce age, we all know that if something is priced below the normal. People respond to it and with MSRP, retailers can reduce the price and still earn a profit.
But major concern is: how do you promote the new price? Regulations prohibit false advertising a sale. If a MAP agreement has been made with the retailer, then retailers can’t really promote a lower price than what was agreed upon.
For instance, if the MAP price for a laptop was $1150 and its MSRP is $1200, then advertisers can promote it on $1175 but not below $1150.
With MSRP, retailers know exactly what amount they can charge without losing their profits. If there was no MSRP in place, consumers would find every retailer offering their own prices and there would be no bargains for anyone.
Manufacturer’s Suggested Retail Price is a standard pricing model that helps everyone – manufacturer, distributors, wholesalers and retailers to earn a profit.
How to use advertised price
- Using MSRP, retailers can figure out promotional strategies like discounts – they can figure out how much they can lose without actually cutting their profits.
- MSRP can be used to determine how much profit you can make while increasing or decreasing the selling price.
- For manufacturers, MSRP helps them to factor in how much everyone involved in the supply chain can earn.
- Manufacturers can easily find out what their competitors are charging as MSRP. Once they do, they can dig deeper into what profit retailers and wholesalers are keeping to find out the manufacturing costs of the competitor’s product. This requires deep level accounting but can be pulled off.