MSRP Definition in Retail Context

You’re looking for a pricing guide. A clear benchmark that’s aligned with your customer’s expectations, market conditions and margins. The Manufacturer’s Suggested Retail Price was created to avoid deceptive pricing practices. In today’s competitive and rapid landscape, a deep and thorough understanding of effective product pricing is essential in any business. In this article, we’ll discover the hows and whats of MSRP to help you find that magic number.

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What is MSRP?

The Manufacturer’s Suggested Retail Price (MSRP) functions as intended. The manufacturer suggests a price at which a product should be sold. It was designed to encourage a level playing field among retailers and set customer’s expectations regarding the potential expense of the product.

However, it is exactly that: a suggestion. Retailers are not obliged to adhere to the proposed figure but instead to use it as a guide. Given that a singular industry product can be sold in many different locations, this method also aims to standardise the cost of a product across regions.

Additionally, consumers do not always pay the MSRP. Charges can be based above or below the suggested amount to encourage consumption and in response to the competition. It is typically displayed both in brick-and-mortar and in e-commerce stores in the interest of transparency.

The MSRP is often referred to as:

List price
Recommended retail price (RRP)
Sticker price
Suggested Retail price

How is MSRP Determined?

In an ever-crowded marketplace, the correct pricing tactics are essential. While the suggested figure aims to encourage reasonable price points for all, industry practices can differ. Buying below the MSRP is a common practice: take for example when retailers purchase an item at a wholesale price while the RRP marks a very high suggested rate.

Market Demand

Pricing strategies hang upon one truly essential factor: market demand. A consumer’s willingness to pay will thus affect the final overall price. Myriad components need to be researched before deciding on a value: competitors, customer’s bargaining power, fluctuations and other external variables that can influence demand.

The price must respond to the current state of the market. Overshooting can result in customer deterrence and substantial losses. If it seems like there are so many aspects to track, that’s because there are. Fortunately, there are many tools to help you calculate the perfect price point and optimise prices automatically.

Materials and Labor (Cost Of Production)

The Cost of Production is a crucial variable in determining price. Raw materials, labour, and shipping must be considered, given that the amount is ultimately required to cover manufacturing costs incurred.

The Total Cost of Production formula can help make more informed decisions: (Total Fixed Costs + Total Variable Cost) x Number of Units.

While important, the cost of production is not (and should not be) the only factor that determines the MSRP. It is limited as it does not provide a holistic overview or granular insights.

Brand Positioning

How a brand is positioned and how beneficial customers perceive the product to be will affect the chosen price. The inherent value of a product can correlate with a larger asking price. A premium product positioned and marketed as such will justify an increase in cost.

The Omnibus Directive – Protecting Consumer’s Rights

As part of the European Union’s “Modernisation Directive”, the Omnibus Directive (Directive (EU) 2019/2161) aims to strengthen consumer rights. It focuses on bolstering the current consumer protection framework by including digital goods and services. The directive will enhance pricing transparency, particularly in the cases of e-commerce and online transactions.

As of 2022, online traders are obliged to:

Inform customers if a price has been personalised (i.e. based on browsing history, customer profiling or previous purchases).
Confirm if reviews have come from a sound source and disclose their review verification process,
Display the previous cost in the case of price reduction.

Thus, retailers must exercise caution when disclosing prices, ensuring that all pricing information is clear, accurate, and not misleading, as any ambiguity can lead to significant penalties under the directive.

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MSRP and Competition Theory

MSRP is often said to be in direct conflict with competition theory. Competition theory posits that in an equal and fair market (i.e. no existing monopolies or barriers to entry), market participants should not be able to dictate market prices.

The recommended retail price allows manufacturers to potentially suggest an increased cost, therefore increasing the likelihood of an adverse effect on consumers.

The Impact of MSRP on retail and e-commerce pricing

As we’ve outlined, market demand is often a key determinant of the figure. When the market demand for a product is increasingly high and will potentially sell rapidly, manufacturers will often inflate the amount. Conversely, retailers may lower the price of on-sale items or clearance goods to shift no longer in-demand stock. A lower-than-suggested price can sometimes be eye-catching and attract the attention of new customers.

Although it is a useful figure of reference for manufacturers, e-commerce and retail businesses may require a pricing method that can go pace for pace with a constantly evolving online ecosystem.

MSRP and Price Sensitivity

Customers should be at the heart of an effective pricing strategy. Retailers and e-commerce store owners should account for price sensitivity relative to the MSRP.
As some are highly reactive to price changes – therefore influencing their demand-, many will be inclined to engage in comparison shopping to source the best deal. In this instance, prices set below or at the suggested rate can be a potent catalyst for purchase. Conversely, consistently placing a price above the recommended price tag can deter customers. By applying a consumer-centric pricing strategy, PricingHUB empowers e-commerce stores to adapt swiftly to and work in tandem with both consumer and economic changes.

MSRP vs MAP – What’s The Difference?

MSRP and MAP (Minimum Advertised Price) are both useful benchmarks used by manufacturers. They have a shared goal of promoting pricing parity. Yet, they both serve different purposes.

MSRP allows retailers to construct pricing strategies based on the recommended price. At its core, its purpose is to offer guidance to shoppers and novice retailers. Preventing dramatic contrasts in prices among retailers is another primary driver. In comparison to MAP, it does not curb the advertised price.

As it suggests, MAP is the minimum amount a retailer can legally advertise a product for sale by law. The aim? To regulate advertised pricing in order to prevent price erosion and protect a brand’s value. In the EU, suppliers and manufacturers cannot set a fixed price. In the USA, however, MAP floor price can be applied.

When Machine Learning and MSRP Collide

While we have only mentioned three, there are a plethora of factors to be gauged before adopting the final price: product lifecycle, value chain, seasonality and regulatory costs to name but a few. Keeping track of these variables can be time-consuming and complex.

PricingHUB offers a turnkey solution that applies the latest in machine learning along with real-time data and predictive analytics to forecast future market conditions. We help businesses to remain proactive, anticipate changes and prepare for potential curve balls. Our rigorous machine learning carries out consistent tests to determine the price elasticity of each product (or service) in your inventory. Prices can be altered instantly to reflect the current market, meaning you can meet your customer’s needs while boosting those all-important profit margins.

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