Understanding MSRP: A Guide to Manufacturer Pricing
When selling an item, retailers can decide on the price point at which they want to sell that item to consumers. This can be at, above or below the manufacturer's suggested retail price. Understanding this concept is useful when working at any point in the supply chain so you can refine your own understanding of how to develop a reasonable price point for a consumer good. In this article, we explain what MSRP is, how it works and some of its advantages and challenges as a pricing strategy.
What is MSRP?
MSRP stands for manufacturer's suggested retail price, also known as list price, which is the amount that the original producer of an item proposes for its cost in stores. Manufacturers can provide an MSRP for any type of product, but they're especially common for expensive, high-end products like cars and appliances.
The main purpose of MSRP is to provide a guideline for retailers and distributors that maintains prices at about the same level for consumers across locations, keeping prices standard and accessible for most customers. MSRP is just a suggestion, however, and retailers can choose whatever price they want when they put an item for sale in their stores. For example, one store may sell a product at above the MSRP to earn a higher profit margin. Another may sell the same product below the MSRP to move inventory at a faster rate during a sale.
Related: How To Calculate Selling Price
How is MSRP determined?
Manufacturers determine MSRP individually, and they may use different methods to establish a final sticker price. They typically consider the total cost of the process to develop and sell the product. This includes profits for suppliers, the manufacturer and the retailer. When determining MSRP, manufacturers project average costs and profit margin expectations across all retailers, with the understanding that they may have different individual costs and pricing strategies.
Related: Retail Math: Definition and Examples
MSRP in the automotive industry
MSRP is an integral part of the auto industry. According to the Automobile Information Disclosure Act, auto dealers need to display the MSRP on either the side window or windshield of all new cars available for sale. They're allowed to sell cars higher than the MSRP, but information about the car's MSRP must be readily available to consumers.
Some states also have additional laws about offering sales and discounts in relation to MSRP, so it's important to read your local regulations when setting retail prices in the auto industry. Each model and trim level for vehicles has its own MSRP, so research into individual versions of similar cars and trucks is key for auto retailers and distributors.
What factors can influence MSRP?
Several elements influence the final calculation for a manufacturer's suggested price for an item, including:
Materials and labor
One significant factor in MSRP is the cost of materials and labor involved with production. The suppliers and vendors that the manufacturer uses to source its materials can charge different amounts over time, causing increases in decreases in MSRP with different batches of products. As wages increase, MSRP may rise as well.
Manufacturers also consider transportation costs in their MSRP calculation. This includes the costs of acquiring their raw materials and shipping finished goods to distributors or retailers. If they handle their own transportation and logistics, they may factor costs of purchasing freight trucks and other equipment into average MSRP per product.
Part of calculating MSRP is considering the demand for the specific product from consumers. If a product is in high demand, the manufacturer may recommend a higher MSRP to retailers. When consumers have low demand for a product, the manufacturer may suggest a low MSRP with slimmer profit margins to encourage more sales.
Manufacturers can typically produce products in a cheaper manner when they generate batches in bulk. If retailers usually buy their products wholesale, manufacturers can often lower the MSRP with higher quantities, resulting in lower MSRP amounts. Individually crafted products correlate to high MSRP due to the intensive effort and small manufacturing batches.
A manufacturer also considers the average markup for each item. They predict how much a retailer may want to profit from each sale, plus their personal profit as the manufacturer. While each sales outlet ultimately has a different profit margin due to operating costs, the manufacturer uses research to calculate average profits and costs for common sales locations.
Sometimes manufacturers create a purposefully high MSRP so that retailers can advertise discounts to consumers. When certain products, retailers and industries have a culture of offering regular sales, manufacturers may list high MSRPs to appeal to those retailers. This is common for home goods, clothing and other types of products that have frequent sales.
Related: Why Market Value Is Important
MSRP pros and cons
MSRP is one of the standard pricing guides in the retail and manufacturing industry. As a pricing strategy, it has both advantages and disadvantages. Here is a basic review of both:
Benefits of using MSRP
Here are the top benefits of using MSRP as a pricing guide:
Standardizing costs: When manufacturers provide MSRP with their products, they help standardize costs for consumers, helping them plan budgets and spend equivalent amounts on their products when shopping at different stores.
Guiding new business owners: For new business owners, MSRP can be a helpful guide to help them set their starting costs. They can then make small adjustments based on operating costs and profits needs as they gain practice.
Educating customers: MSRP provides customers with knowledge about how much they can expect to spend on a product, educating them about a reasonable cost for goods on the market instead of relying on the retailer.
Starting point for negotiations: In the auto industry, dealers and customers can both use the MSRP for a car as a starting point for a negotiation to find a price that works for both parties.
Challenges of MSRP
When using MSRP, consider these potential disadvantages and challenges:
Potential price gouging: Sometimes, manufacturers intentionally set MSRP higher than necessary to allow retailers to over-charge, so it's important to be ethical with your individual pricing policies.
Lack of guidelines: Because there isn't a single method for determining MSRP, it may be challenging to find a method that works for every manufacturer to accurately predict a sales price.
Generalization: Some retailers may need to charge more to cover sales prices while others charge less, so MSRP can sometimes be an over-generalization.
Because MSRP is a suggestion, it's important to remember that your individual situation is most important for setting prices. Considering individual factors can help you make custom adjustments after using MSRP as a starting point.
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