What is MSRP?
MSRP stands for Manufacturer’s Suggested Retail Price. It is a price that the product manufacturer recommends the retailers sell at in their stores to the end consumer. It is also often referred to as the List Price or RRP (Recommended Retail Price)
MSRP is not restricted on automotive industry only. In fact, as a fashion buyer, I often deal with clothing suppliers who use a Manufacturer’s Suggested Retail Price (MSRP).
It should be noted, however, that MSRP is used by manufacturers who sell their own brands through distributors or retailers. Manufacturers who manufacture your products for you, under your own private label, will not try to set a RRP.
How Do Manufacturers Arrive to a Suitable MSRP?
While setting a suitable MSRP, the manufacturer will consider all the following factors and arrive to a final recommended price:
- Product manufacturing cost
- Brand marketing & advertising costs
- Wholesalers’, distributors’ and retailers’ markup
- Supply & Demand
Why Do Manufacturers Set a MSRP?
There are many reasons a manufacturer would want to set and enforce a recommended retail price. You might think that they don’t have the right to do this, or that it is a free market and they shouldn’t try to enforce a price. But if you speak to brand owners, you will understand why using this practice might be essential for their survival for many different reasons.
These reasons will include:
To Make it Attractive For Retailers To Carry Their Products
This is an example of a price list that I usually receive from suppliers when I enquire about their products.
As you can see, the supplier will give you the invoice price (yellow), which is the amount you will pay them, and the MSRP (green), and show you the margin that you will get if you carry their product and sell at that price (orange).
In fact, this piece of information is very important for me as a buyer. I want to make sure before carrying someone’s products at my store that:
- Its sale price will be suitable for my customers
- I can make good margins on it
These two points come hand in hand.
Many times I back down from carrying a specific range at my stores, because the price level is too premium for my target customers. Even when the margins are high enough.
So, setting a RRP helps the manufacturer in finding the right retail stores to sell at and vice versa.
To Protect Their Brand Positioning
When you start your own clothing line, one of the first things you decide about is which brand segment you want to be into.
You can choose to be a value brand, a premium brand or a luxury brand.
This choice will then dictate a lot of things in your marketing and branding strategy, and one of them is the price level. You need to make sure that the stores that will carry your brand will keep the prices within the same price level that matches your brand positioning.
With gross margins in the clothing industry being wide enough (in the 50s to 60s range), retailers that will carry your brand will have enough room to use this wide margin to undercut each other to attract more customers to their particular stores.
Which takes us to the next point…
To Sustain Interest in Their Products
When there is a wide intake margin for the manufacturer’s products, discounters can enter the game and try to sell at lower prices and makeup for that in the volume they will sell.
This is, however, a downward spiral.
One player will cut the price, then the other will cut more,… and so on.
At the end of it, the products will not have enough margins anymore, and will stop being attractive to retailers to carry.
This is besides the pressure the retailers will start to put on the manufacturer or the brand owner to lower his own wholesale price, so they can still maintain healthy margins on his products, or otherwise replace him with other products that are more profitable for them.
So the discounting that will start at store level will eventually catch up with the manufacturer’s price itself. At this point the product will stop being profitable for anyone.
This is why pricing is a very sensitive and important aspect of doing business.
Can You Sell Below The MSRP?
According to the FTC a retailer has the right to sell at any price, and the MSRP is not binding in any way.
How Can a Manufacturer Enforce His MSRP?
You might ask: ” So what is the point of setting a MSRP, if it is not binding?“
There are many ways a manufacturer can still enforce his MSRP, and these include:
Choosing Distributors & Retailers
The manufacturer has the right to choose which retail stores to sell his products at and which ones to cut off, and so the manufacturer has the right not to use retailers or distributors that do not stick to the MSRP.
As we have seen here, it is in the manufacturer’s best interest to keep his products profitable for the retailers that carry them. So usually manufacturers use their power to ensure they can maintain that balance between the different resellers, by preventing practices that might be harmful for everyone involved in selling this product.
Cooperative Advertising Programs
Since the brand itself belongs to the manufacturer and he has big interest in promoting it, he will usually use a cooperative advertising program that shares the costs of advertising his own products with the resellers.
Manufacturers can use such programs to enforce their RRP, by allowing only those retailers who stick to the MSRP to participate in this program and benefit from it.
Selling on Consignment
Not all manufacturers sell their products on wholesale.
Some strike a deal with retailers to use the retail space and resources available at the store to sell their products directly to the end consumer on consignment basis.
Read Also: How Consignment Works?
In this case, the retailer gets a commission (often around 40%) when the product is sold from their store and they don’t have to pay for the inventory until it is sold.
Since the retailer does not buy the merchandise or carry any responsibility for clearing the excess inventory, the retail price in this case is set by the manufacturer. If the retailer wants to include these products in a store-wide promotion that he is planning, he will need to get approval from the manufacturer for reducing the price.
This way, the manufacturer or brand owner ensures his products are sold at the MSRP
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