Manufacturer Suggested Retail Price (MSRP): Definition, Calculation, Benefits and Limitations

What is MSRP?

Manufacturer Suggested Retail Price or MSRP is the manufacturer recommended price of an item for the customers buying it at the retail store.

MSRP is also known as recommended retail price (RPR), suggested retail price (SRP), sticker price, and list price.

This price is usually 2-3 times higher than the wholesale price for the same item. If you’re interested in learning more about wholesale prices, you can find valuable information in our comprehensive guide on the wholesale price index.

Retailers may or may not follow MSRP, selling products at a higher or lower price than MSRP.

Example

Suppose you are going to buy a new car and visit a car dealership. You pick a vehicle with a sticker price of $15000. But the dealer has priced the same vehicle for $17000.

Seeing the price label, you get to know that the dealer is overcharging you. Now you can negotiate the price down to $15000 using MSRP.

What is the Purpose of MSRP?

For Manufacturers

MSRP helps manufacturers sell specific products at the same price in the entire market. It also serves as a counter to the wrong pricing practices done by some of the retailers.

For Retailers

MSRP helps all the parties involved in the supply chain to earn their profit.

It also helps retailers who are new to the business and don’t have a customer base yet. They can offer a slightly lower price than the MSRP to attract customers.

How do Manufacturers Determine MSRP?

Product manufacturers use a variety of methods to determine the MSRP. They first calculate the following costs for the product:

• Manufacturing
• Distribution
• Selling

Other than this, MSRP also takes into account the profit margins for manufacturers, wholesalers, and retailers.

Formula to Calculate MSRP

One of the formulas used to calculate the MSRP of a product is:

MSRP = C + P

Where,

C = Cost of the Item

P = Estimated profit margin

Example

For example, the manufacturing cost of an item is $50.

Now we need to calculate the profit margin for manufacturers, distributors, wholesalers, and retailers, which can be as follows:

Total profit margin = 2.5 + 5 +7.5 + 10

= 25

Using the formula mentioned above,

MSRP = Cost (50) + Profit Margin (25)

= $75

So, a product with a cost price of $50 will have an MSRP of $75.

What are the Benefits of MSRP?

Some of the benefits of MSRP include:

Standardized Price

When manufacturers suggest a specific price for a product, it increases the chances of consumers getting the same price across different retail stores.

Customer Education

MSRP helps to educate customers about fair product prices suggested by the manufacturers. It helps them identify retailers who may offer a higher price to increase their own profits.

Brand Equity

MSRP helps brands to work on their equity or value. This comes from customers’ perception of a brand’s quality and desirability.

When a brand carefully determines their prices, and customers find them consistent across the stores, it improves the brand’s image in the customers’ eyes.

Helps Retail Businesses

MSRP is also beneficial for new retail businesses who are unsure of pricing techniques and strategies.

They can avoid losses by offering prices according to or close to the MSRP

What are the Limitations of MSRP?

Some limitations of using MSRP include:

Price Manipulation

MSRP is a suggested price that retailers can manipulate. They might offer unreasonably higher product prices than the suggested retail price.

Undefined Calculation Method

There is no defined method for accurate MSRP calculation. This makes it difficult to predict an accurate selling price for the product.

Biased Price Calculation

Sometimes manufacturers intentionally suggest a high product price to let retailers earn more profit.

FAQs

Q: What is the Maximum Suggested Price (MSP)?

Ans: MSP is the highest retail price at which goods can be sold to customers.

Q: What is the Difference Between the Suggested Retail Price (SRP) and Retail Sale Price (RSP)?

Ans: Suggested retail price (SRP) refers to the manufacturer’s suggested retail price (MSRP) for a particular good. However, a retail sale price (RSP) is the adjusted MSRP decided by the retailer to fulfill their business requirements or as finalized after negotiation with the buyer.

Q: What is the Difference Between MSRP and Invoice Price?

Ans: MSRP is the price recommended by a manufacturer for a consumer. In contrast, invoice is the price paid by buyers to the manufacturers.