Retail price is the final price consumers are expected to pay for a given product. It appears on a product at the retail store, the final point of a product’s journey before a consumer accesses it.
Retailers determine prices after factoring in what the manufacturer asked for the product and the shipping cost. Retail prices also include enough profit to make business sense for the retailer to sell said products.
A lot goes into determining a retail price. Remember, retail prices must consider the inflation rate, competitor prices, the manufacturer-suggested retail price, and other variables that affect the overall business performance. This article looks into the retail price, how it affects your business or purchasing decisions, and how best to approach its determination.
What Is the Retail Price?
As mentioned, the retail price is the final quoted price customers pay for a given product at retail stores. As the final product, it is usually higher than other prices per unit in the supply chain. Since a product goes through several stages and is handled by different players, a price is set at each stage.
For example, there is the manufacturer price, distributor price, etc. The retail price is the final one set since a customer is the product’s consumer.
What Factors Determine the Retail Price?
A retailer bears all the costs passed down the supply chain, then factors in their profit, and looks at supply and demand to determine the final price. Here are the key factors that determine the retail price:
A significant factor is a price a retailer has to pay to acquire products for their store. Product cost covers fixed, variable, and semi-variable costs that come up during the product’s production, distribution, and selling. While these factors can be complex, they usually boil down to the unit cost of production, expressed as a fraction of the total cost of production.
Buyers may be ready to pay more for a product they perceive to be worth the extra cost or may not oppose price hikes if they believe the same. The product’s utility, marketing approach, and competition performance affect its demand, affecting the quoted price.
It is worth explaining the competitive advantage more. A product’s competition affects how much you can sell it for. The price can go up if the competition has lower-quality products and does not do extensive marketing. However, the closer a competing product is in terms of quality, placement, overall marketing, and appeal, the harder it is to ask consumers to pay more.
Government and Legal Regulations
Sometimes the government has to step in to regulate product prices, especially in the case of high demand or monopoly. Left to their own devices, some manufacturers, distributors, or companies would inflate prices exorbitantly in a capitalist economy. Therefore, the government can enforce laws protecting consumers from predatory practices.
A retailer will price products depending on their specific objectives in a given market. For example, small retailers may offer lower prices for their goods to attract a larger market share. Alternatively, an established retailer could lower product prices to cope with competitive forces.
A retailer could also charge more for a product if it employed expensive marketing tactics or if the manufacturer passed on the high cost of luxurious product packaging. Additionally, a brand can charge a higher purchase price for its high-end products because of their value.
What About the Manufacturer Suggested Retail Price?
With so many market forces leading to different prices for products that perform the same purpose, manufacturers can set a suggested retail price to keep things uniform and prevent predatory behavior. The manufacturer-suggested retail price (MSRP) is what a product manufacturer suggests to be set at the final point of sale. Retailers don’t necessarily have to comply with the suggestion, but it instills a sense of fair play.
Market forces are still highly influential, where a retailer can sell products below the MSRP to move more inventory. Additionally, they may sell at a higher price for profits and to capitalize on higher demand.
The MSRP is not always a good thing. Some manufacturers tend to set the price higher than what consumers can afford. Such discouraging prices make it hard for retailers to move inventory, thus unable to operate efficiently.
The upside of MSRP is creating awareness among consumers of reasonable price ranges. Knowing what to expect, especially for new products, helps customers make informed purchase decisions.
Is There a Retail Price Formula?
Having a retail price formula helps keep price determination simple. Other forces are vital in determining price, but these formulae help in better understanding the process:
- Retail Price = Cost of Goods + Markup
- Markup = Retail Price – Cost of Goods
- Cost of Goods = Retail Price – Markup
Tips for Determining the Retail Price
- Review the MSRP, as it gives you an idea of where to start deliberating the best price. You’ll also learn of a product’s value based on what a manufacturer considers profitable in the following stages.
- Check the competition prices, and consider setting yours close to theirs. Your competition injects a dose of reality into your pricing, allowing you to determine a price point palatable for your customers.
- Make a product quality comparison to determine how yours stacks up against what the competition offers. Customers do the same, so it helps to do it from their perspective to determine why they would be willing to pay more or less for yours.
- Consider your brand image. If you sell high-end products, your prices have to reflect that prestige as customers have become accustomed to it. Alternatively, if you’re known for offering discounts and running other promotions, you’ll have to price accordingly.
- Price according to inventory movement, where you may have to lower prices on slow-moving products to clear inventory and recover through newer and more popular products.
Retail pricing considers so many factors to arrive at the right quoted price. The price has to ensure you earn profits, beat the competition, remain fair to customers, and comply with government and legal regulations. This article shares several factors you need to consider and how best to set the retail price.
Paul Martinez is the founder of EcomSidekick.com. He is an expert in the areas of finance, real estate, eCommerce, traffic and conversion.
Join him on EcomSidekick.com to learn how to improve your financial life and excel in these areas. Before starting this media site, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.