Manufacturer's Suggested Retail Price (MSRP) - Explained
What is MSRP?
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Table of ContentsWhat is Manufacturer's Suggested Retail Price?How does the Manufacturer's Suggested Retail Price Work?Drawbacks of Manufacturer's Suggested Retail Price (MSRP)Academic Research on Manufacturer's Suggested Retail Price - MSRP
What is Manufacturer's Suggested Retail Price?
The Manufacturer's Suggested Retail Price (MSRP), also known simply as the list price, is the price at which a manufacturer recommends that a particular product be sold in retail outlets. The MSRP is also variously known as the recommended retail price (RRP), the suggested retail price (SRP) or the sticker price. The MSRP of a particular product is typically set in such a way as to reflect all the manufacturing, advertising and selling costs associated with that product. All retail products essentially carry a list price. While relatively cheaper goods such as consumables, apparel, electronic goods and household appliances usually carry a sticker price, more expensive or larger products such as automobiles also carry an MSRP as well. The MSRP is also available for items listed on e-commerce sites.
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How does the Manufacturer's Suggested Retail Price Work?
The rationale behind designing a suggested retail price for products is to establish uniformity in the prices of such products from store to store, while simultaneously ensuring that all parties involved in the transaction - the manufacturer, the wholesaler and the retailer are profitable at the completion of the retail sale. Although such standardized prices ensure that consumers do not have to overpay for the goods purchased, several retailers actually sell products for lower prices than the MSRP. This is typically done to move inventory from the shelves during periods of slow sales or as part of competitive pricing strategies aimed at outdoing the prices offered by competing retailers. Since retailers usually purchase products from manufacturers at wholesale prices that are well below the MSRP, it is possible to offer huge discounts on the listed prices and still turn a profit. On the other hand, retailers may choose to sell certain products for prices higher than the MSRP. This is usually done when the products are in high demand and /or in low supply and the retailers are convinced that they will sell quickly irrespective of the higher prices. However, in countries such as India and Bangladesh that use the concept of the Maximum Retail Price (MRP) instead of the MSRP, it is illegal to sell any product above its maximum retail price that is determined by the manufacturer. In the United States, MSRP plays a significant role in the automotive sector. Historically, before the advent of the concept of suggested pricing, automobile dealers often indulged in arbitrarily setting selling prices, based on what they thought a prospective customer would be willing to pay for a particular vehicle. Prices of vehicles often varied from dealer to dealer as a result of the inconsistent nature of markups. However, with the widespread popularization of MSRP, vehicle dealerships are now required by law to display the prices of the vehicles, either on stickers on the windshields or on specification sheets. Potential customers can use these sticker prices as bases for further negotiating the final selling prices of the vehicles.
Drawbacks of Manufacturer's Suggested Retail Price (MSRP)
The principle of manufacturer-suggested retail pricing conflicts with the basic foundation of the competition theory. Although the MSRP of any product usually takes into account the manufacturing as well as selling costs associated with it, not all retailers are able to turn similar profits by selling the product at similar prices. This is because large retailers typically buy in bulk directly from the manufacturer at much lower wholesale prices. On the other hand, smaller retail stores generally source their merchandise from distributors in relatively lower quantities and higher wholesale prices. Secondly, it is possible to manipulate the MSRP to unreasonably higher figures. Manufacturers often set an unreasonably high list price on their products, only for retailers to offer them at highly discounted prices. Such manipulation makes the offer prices seem extremely value-for-money to unsuspecting consumers.
Academic Research on Manufacturer's Suggested Retail Price - MSRP