Let’s differentiate between list price and retail price. What is a list price? Most commonly known as MSRP or manufacturer suggested retail price, list price is the price that a manufacturer will recommend the retailers to sell at. To learn more, please read our articles of List price and MSRP.
Breaking down retail price
When you look at a retail price, you are also looking at the cost price (the amount of money manufacturer paid to make a product or service). This includes property costs, utilities, raw materials etc. The manufacturer adds his profit margin and then sells their product to the retailer. Let’s look at this with an example.
To fully understand how retail prices are charged, we will have to create a hypothetical retail chain. For example, lets take a company called Acme Inc. which creates keyboards. Lets say the cost price for a single keyboard would be $3. To earn a profit, Acme Inc. would have to sell their keyboards at a wholesale price of $5 to distributors, keeping $2 as their profit margin.
Operating costs and shipping
Distributors are usually the middle men that buy products in bulk and then sell them to retailers like Walmart or Tesco for example. Considering their operating costs and shipping, the distributors would then charge the retailers for their profit margin.
The cost of goods will now be at $7.
Retail pricing and list price
Now the retailers will have the keyboards and since they are getting it at $7, they will be most likely selling it at $8 or $9.
To ensure the price is consistent across all the locations the product or service is going to be consumed, Acme Inc. could also set a list price or MSRP of $10. In this example you will notice that $10 gives a lot of room to everyone involved to have their profit margin. But for retailers, the best thing to do is to charge less than the list price since they are working in competitive environment.
If the Acme Keyboard is being sold at the list price, there is a very high chance that another manufacturer would be selling it at a list price of $8. To ensure they get customers, retailers will then opt for a lower retail price to ensure sales and their own profits.
Did you know that manufacturers tweak their list prices according to the market conditions? If there is a strong demand of their products, they will increase their list prices and lower them if the economic conditions are not as strong as they want them to be.
Manufacturers also have to think about their competitors. What if their competitors have managed to lower their cost price and this is reflected in their list price? For instance, if Acme’s competitors are offering keyboards at a list price of $7 then Acme would have to match that price to ensure they don’t lose their market share. Whenever there are changes in list prices, it effects everyone involved in the process.
Distributors and retailers
Distributors would have to consider the best way to minimize the operating costs so that they can earn a profit whereas retailers would have hire more staff to meet with the increasing demand or refuse new orders when the demand of the product is low.
Today, consumers can choose from wide array of options and they are prone to look for the best price when shopping. This creates a competitive market where retailers have to consider what the demand in the market is and how they can ensure they can attract customers to their shops. There are two things they can do. Pricing products and services below their competitors:
Retailers sometimes lower their prices so that consumers will opt for them. This is possible if the retailer can get a good price from the distributors or manufacturers or has a good marketing plan where they can promote the price specials.
Pricing higher than the list price
Retailers can also price products and services higher than list price. Retail prices are usually higher for novelty products like iPhone or a Rolex watch. Sometimes consumers buy products at higher prices due to their exclusiveness. This is where retail prices can be higher than the list price without worrying what the competitors are charging.
When it comes to retail price, things are little different and tougher for small retailers. They compete not only with their own peers, but also with bigger retailers that have better purchasing power and can get better prices from suppliers.
In their case, retail price cannot be negotiated as easily as they would want to. So they focus on creating relationships with their customers, giving more personalized service and opting for high end products and services to keep their business afloat.