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What is Retail Price and How to Calculate It

10 min read

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

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

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Retail Price Meaning

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

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

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

What is Retail Price, and How Is It Chosen?

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

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

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

Wholesale vs Retail Price

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

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

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

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

How to Calculate Retail Price

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

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

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

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

Retail price calculator

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

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

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

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

  • Retail Price = Markup + Cost of Goods
  • Cost of Good = Retail Price — Markup
  • Markup = Retail price — Cost of Goods

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

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

Retail Price Summary

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

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

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

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Are you a retailer or business owner? Ecwid by Lightspeed is ready to help you grow! Our role is to assist businesses in their goal to sell anything, anywhere, to anyone, at any time. Ecwid by Lightspeed makes building and managing a business easier than ever through its state-of-the-art POS system.

To learn more about how to sell, market, and manage your up-and-coming businesses, sign up for Ecwid today!

 

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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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