A retail price is the final price of an item in a store, calculated based on the cost price and other factors. It’s what the customer pays for the item, not what the retailer pays for it. Before you can set a retail price, an item has to be created and transported, and the costs of those processes matter.

This article will cover retail prices, how to charge an item, and more.

Retail Price Meaning

Before we get into the meaning of retail price, we need to understand the supply chain. A supply chain is the series of steps that get an item to a customer, ultimately determining the price customers pay.

Supply Chain

The supply chain starts with the movement of raw materials to create a product. It encompasses the entire manufacturing and sales process, from raw materials to the final product. Let’s use a sweatshirt as an example.

Raw Materials: The raw materials for the sweatshirt, fabric, thread, and labels are sourced and collected.

Wholesaler: The raw materials are sold to a wholesaler, an intermediary in the supply chain.

Manufacturer: The wholesaler sells sweatshirts to the manufacturer who produces the sweatshirt. The manufacturer combines the raw materials into a finished product that is ready to wear.

Retailer: The manufacturer sells and delivers the sweatshirt to the retailer. The retailer’s job is to market and sell to the end customer.

Pricing in the Supply Chain

Along the way, there are multiple prices:

Manufacturer Price: The price at which the manufacturer sells the sweatshirt to the retailer. The invoice price is the amount paid by retailers to manufacturers, which is typically lower than the retail price.

Distributor Price: The price set by distributors who may move products between manufacturers and retailers.

Retail Price: The price at which the retailer sells the sweatshirt to the customer.

As the product moves up the supply chain, the price increases. This ensures that each participant in the chain—manufacturers, wholesalers, distributors, and retailers—can make a profit.

What is the Retail Price, and How is it Chosen?

You may ask what the retail price or recommended retail price is and how retailers charge for an item. While every retailer’s goal is to make a profit, the key is to find a balance between affordability for the customer and a healthy profit margin. If you price an item too high, customers will go elsewhere.

Retail Price

In the supply chain process, manufacturers often suggest a retail price called the manufacturer’s suggested retail price (MSRP) or Manufacturer’s Suggested Retail Price. This price is based on the manufacturer’s cost to produce the item and is influenced by:

Manufacturer’s Price: The cost to the manufacturer of producing the product, including materials, labor, and overhead.

Average Markup: The average markup percentage retailers apply to products in their category. This is added to the manufacturer’s price so retailers can make a profit.

You may have seen MSRP when shopping for items like electrical appliances or cars. MSRP is to establish a fair and consistent price across all retailers so that both retailers and customers have a benchmark.

Retailer Pricing Flexibility

While manufacturers encourage retailers to stick to the MSRP, retailers don’t have to. Retailers must consider price-sensitive customers when setting their prices to remain competitive. The retail industry is a competitive free market, so retailers have the flexibility to set their own prices based on their business strategy and market conditions.

However, because retail is competitive, businesses that offer similar products at a lower price will attract and retain customers. This competition forces retailers to think carefully about their pricing strategy to be attractive to customers and still make a profit.

Wholesale vs. Retail Price

As mentioned earlier, retailers don’t work directly with manufacturers; before products get to retail stores, they go through wholesalers. Retailers must consider the trade price when setting their retail prices to ensure profitability. A wholesaler sells products in bulk to retailers so they can profit from the sale of those products.

Wholesale Pricing

Bulk Buying: When retailers buy in bulk from wholesalers, the wholesale price per unit is reduced. They can sell at a higher price and still make a profit.

Raw Materials: Some businesses use wholesale products as raw materials to create their own products. For example, a business might buy thread and fabric to make quilts. If the materials for one quilt cost $20, the retailer can sell the finished quilt for $120 and make a profit of $100. This allows resourceful businesses to make their own products using wholesale goods and sell those goods immediately after purchase.

Retail Pricing

When comparing wholesale and retail prices, retail prices are higher. The retail price of an item is influenced by:

Item: The type of item itself can affect pricing. Some items have higher perceived value, so they can be marked up more.

Quantity: The wholesaler’s purchase quantity can also impact the price. Larger quantities mean lower cost per unit, but the final retail price will still reflect the retailer’s desired margin.

Remember, the supply chain is structured so each participant (manufacturers, wholesalers, and retailers) can make a profit, so retailers don’t always make the highest profit.

Wholesale Pricing Access

You might wonder, if wholesale prices are so cheap, why don’t regular customers buy wholesale directly? It may seem advantageous for individuals to purchase directly from wholesalers, but there are several reasons why this is not common:

Business Requirements: To buy from wholesalers, individuals need to have a business or work in a specific industry. Wholesalers require proof of business before allowing purchases.

Minimum Order Quantities: The quantities for wholesale buying are much higher than what an individual customer would need. It’s not practical for regular customers to buy in bulk.

Retailer Pricing Power: Most customers don’t have access to wholesalers, so retailers can set the price for the products they sell. Retailers can use their relationship with wholesalers to offer products at a price customers will pay.

How to Calculate Retail Price?

Many businesses use MRP (Manufacturer’s Recommended Price) and profit margins to help determine retail price. To calculate retail prices, you need to understand that MRP is the maximum price a retailer can charge for an item, including any fees and taxes.

MRP (Manufacturer’s Suggested Retail Price)

While retailers can set their own retail prices, there is a market-driven scale for certain items. Pricing above the upper end of that scale is perceived as unreasonable by most customers. So, most products display MRP on the packaging to indicate a fair price. Manufacturers set the MRP.

The purpose of MRP is to protect the customer. Without material requirements, businesses could overcharge products. While this may seem good for customers by limiting retailer pricing power, it actually gives more power to the manufacturer.

Manufacturers can change the MRP at any time without any external influence to dictate the price. This can mean higher costs for the customer. The MRP may fluctuate over time due to changes in material cost, but no governing body controls this process.

Retail Price Calculator

For retailers, knowing how to set a retail price is critical to running a business. Let’s use an example.

Example: John owns a local kids’ clothing store. He buys 300 baseball hats from a wholesaler for $15 each. The wholesaler bought the hats for $9 each, and the Manufacturer’s Suggested Retail Price (MSRP) is $20 per unit. John sees the kids’ store down the road selling their baseball hats for $20. To get customers, he decides to sell his hats for $18, which gives him a $3 margin. Customers love the lower price compared to the MRP, so he gets more sales.

How to Calculate?

John can use several ways to calculate retail prices. One is the Retail Price Formula, which is:

Retail Price = Markup + Cost of Goods

Cost of Goods = Retail Price – Markup

Markup = Retail Price – Cost of Goods

This formula allows retailers to determine the selling price based on their desired margin. For example, if John wants to have the same margin for all his products, he can use this formula for various items in his store.

John can also use an online retail price calculator to make calculations easier. These tools allow users to input their cost and desired margin, which generates the retail price.

The Human Factor in Pricing and Profit Margins

While calculating is part of the pricing process, John knows there is also a human factor involved. Setting a markup is more than just maximizing profit per unit. He knows that offering a lower price will mean long-term profitability.

Customer Relationships

By offering lower prices, John can build trust in the community and attract a loyal customer base. This benefits his business, customer satisfaction, and community relationships. When customers feel they are getting a good deal, they will come back and recommend the store to others.

Competitive Analysis

John should also regularly perform competitive analysis to ensure his pricing is competitive. By monitoring the prices of similar products in other stores, he can adjust his pricing strategy as needed. This proactive approach will keep him ahead of the market and allow him to respond to changes in customer demand.

Price Psychology

John can also use price psychology. For example, pricing an item at $19.99 instead of $20 will make it look like a better deal, even if the difference is negligible. This will affect consumer behavior and make them buy.