What is Retail Price and How to Calculate It

Posted 2 years ago by Max Komonov

A桂retail price refers to桂the桂final cost of桂an桂item at桂a桂retail store. It桂signifies the桂cost of桂the桂item for桂the桂customer, not what the桂retailer originally paid for桂it. Before a桂retail price is桂set, a桂retail item is桂created and桂transported. The cost of桂creating and桂transporting the桂item will determine the桂retail price.

This article will discuss the桂meaning of桂retail price, how businesses decide what to桂charge for桂an桂item, and桂more.

Retail Price Meaning

Before discussing retail price meaning, it�셲 important to桂understand the桂supply chain process. A桂supply chain is桂essentially the桂steps taken that lead to桂the桂acquisition of桂an桂item by桂a桂customer.

A桂supply chain begins with the桂movement of桂the桂raw materials of桂a桂specific product (let�셲 use a桂sweatshirt as桂an桂example). These materials will be桂brought to桂a桂wholesaler, who will sell them to桂a桂manufacturer (a桂maker of桂the桂sweatshirt). The manufacturer will combine the桂raw materials until the桂sweatshirt is桂complete and桂ready to桂be桂worn. From there, the桂manufacturer will sell and桂deliver the桂piece of桂clothing to桂a桂retailer. The responsibility of桂the桂retailer is桂to桂sell the桂sweatshirt to桂the桂customer.

There are multiple prices involved in桂this process: manufacturer price, distributor price, and桂retail price. The price of桂the桂product gets higher as桂it桂goes up桂in桂the桂supply chain. This is桂to桂ensure that each part of桂the桂chain makes a桂profit for桂their work.

What is桂Retail Price, and桂How Is桂It桂Chosen?

You may wonder, 혫What is桂retail price, and桂how do桂retailers establish the桂cost of桂an桂item?혬 While the桂goal of桂any桂retailer is桂to桂maximize profit, it桂is桂important to桂strike a桂balance between affordability and桂profit margin. Marking a桂product up桂too high may cause customers to桂shop elsewhere.

깝꾈桂넨농깎桂supply chain process, manufacturers suggest a桂retail price (MSRP) based on桂the桂manufacturer�셲 price. Manufacturers consider the桂average markup (a桂percentage added in桂order to桂strike a桂profit) of桂a桂product before suggesting the桂MSRP. You may have heard the桂word MSRP while shopping for桂electrical appliances or桂cars. The purpose of桂the桂manufacturer�셲 suggested retail price is桂to桂set a桂fair and桂consistent price across different retail businesses.

While manufacturers encourage retailers to桂use MSRP, retail businesses do桂not have to桂do桂so. The retail industry is桂considered a桂competitive, free market, so桂retailers are allowed to桂set their own prices. However, due to桂its competitive nature, businesses offering similar products for桂a桂lower price are more likely to桂retain their customers.

Wholesale vs桂Retail Price

As桂mentioned earlier, retailers do桂not only work with the桂manufacturers. Before products reach the桂retail stores, they first go桂through wholesalers. The role of桂a桂wholesaler is桂to桂sell items in桂bulk to桂retailers for桂profit. Since retailers buy these items in桂bulk, the桂cost is桂often much lower per unit.

This allows them to桂sell those products for桂a桂profit online or桂in桂stores. Some businesses will also use the桂wholesale products as桂raw materials to桂make other products. For example, a桂business can buy items like thread and桂fabric with the桂intention of桂making quilts. The materials used for桂one quilty may cost $20. As桂the桂retailer, they can choose to桂sell it桂for桂$120, effectively banking $100桂profit. Resourceful businesses will both make their own products using wholesale goods and桂sell those goods directly after purchase.

When it桂comes to桂wholesale vs桂retail price, retail prices are designed to桂be桂higher. The specific item and桂how much is桂purchased by桂the桂wholesaler will determine the桂price. However, the桂supply chain is桂designed for桂each leg of桂the桂process to桂make a桂profit. Therefore, retailers do桂not necessarily make the桂most money within the桂chain.

If桂wholesale is桂so桂much cheaper, why don�셳 regular people also buy wholesale? While it桂may seem advantageous for桂non-businesses to桂buy directly from wholesalers for桂the桂products they need, regular people often cannot. In桂order to桂do桂business with wholesalers, you must be桂a桂proven business or桂work within a桂particular industry. In桂most cases, the桂amount of桂units is桂often much higher than an桂individual would need. Lack of桂access to桂wholesalers also allows retailers to桂set prices for桂most consumers.

How to桂Calculate Retail Price

Many businesses use MRP (material requirements planning) to桂help calculate retail prices. How to桂calculate retail price depends on桂the桂full form of桂MRP. The full form of桂MRP is桂essentially the桂most a桂retailer can realistically charge for桂an桂item, including fees and桂taxes.

While retailers can technically set the桂retail price, there is桂a桂certain scale set in桂the桂market for桂specific items. Extending beyond the桂higher end of桂that scale will be桂viewed as桂an桂unreasonable price tag for桂most consumers. Most products have the桂MRP visible on桂the桂packaging as桂a桂way of桂showing a桂reasonable price for桂the桂item. Manufacturers are in桂charge of桂setting the桂MRP.

The purpose of桂MRP is桂to桂support consumers. Without material requirements planning, businesses can more easily overcharge. On桂the桂surface, this seems like a桂big help for桂customers by桂giving retailers less power. The process becomes more complicated because it桂actually gives more power to桂the桂manufacturers.

Manufacturers can change the桂price of桂MRP at桂any桂time without outside influences. Therefore, they are capable of桂naming their price, which ultimately leads to桂a桂higher price for桂consumers. While the桂price of桂MRP may change over time due to桂the桂cost of桂manufacturer materials, there is桂no桂way of桂regulating this process.

Retail price calculator

As桂a桂retailer, knowing how to桂set a桂retail price is桂a桂vital part of桂your business. Let�셲 use the桂following example to桂help simplify the桂process:

John owns a桂local kid�셲 clothing store. He桂purchases 300桂baseball hats from a桂wholesaler for桂$15桂dollars per unit. Before that, the桂wholesaler had purchased the桂baseball hats for桂$9桂per unit. The manufacturer�셲 suggested retail price (MSRP) is桂$20桂per unit.

John knows that the桂kid�셲 retail store down the桂road sells their baseball hats for桂$20. He�셲 determined to桂have the桂cheapest hats in桂town, so桂he桂decides to桂sell them for桂$18桂(a桂$3桂markup). Customers appreciated that his price was lower than the桂MSRP, which led to桂more purchases.

There are multiple ways that John can calculate retail prices. One way is桂to桂use the桂Retail Price Formula. This formula looks like this:

Retail Price =桂Markup +桂Cost of桂Goods
Cost of桂Good =桂Retail Price桂�� Markup
Markup =桂Retail price桂�� Cost of桂Goods

He桂can also use an桂online to桂do桂the桂math for桂him. Overall, calculating retail prices can be桂helpful for桂retailers and桂consumers alike.

While doing the桂math is桂an桂essential part of桂price setting, John understood there was also a桂human element to桂the桂process. Deciding on桂a桂markup is桂about more than just making the桂most money per unit. He桂understood the桂value of桂lowering the桂costs in桂order to桂create longer-term profits. Lower, more affordable prices can help to桂create trust within the桂community, ultimately leading to桂loyal customers.

Retail Price Summary

Retailers receive products from the桂supply chain. The supply chain starts with the桂transportation of桂raw materials to桂a桂manufacturer. The manufacturer makes the桂product and桂sells it桂to桂a桂wholesaler (or distributor). The manufacturer also offers a桂suggested price (MSRP) to桂retailers in桂order to桂ensure a桂fair price for桂consumers. The wholesaler or桂distributor will then sell the桂products to桂a桂retailer.

The retail price will be桂set based on桂the桂manufacturer price, wholesaler price, and桂MSRP. Retailers will charge more than what they paid in桂order to桂earn a桂profit. Due to桂the桂free market, retailers can set their own prices. However, due to桂the桂competitive market, overpriced items may cause customers to桂shop elsewhere.

Retailers can use the桂Retail Price Formula or桂a桂Retail Price Calculator to桂ensure they are offering a桂fair (and profitable) price for桂items.

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About The Author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

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