What is a Recommended Retail Price (RRP)?

The recommended retail price (RRP), also known as the manufacturer’s suggested retail price (MSRP) or, simply, suggested retail price (SRP), is the price at which a manufacturer or supplier recommends its retailers sell a product.

It establishes a consistent pricing benchmark across sales channels for the product in question, reflecting factors such as production costs, desired profit margins, and market conditions.

While manufacturers suggest the RRP (and may have additional pricing requirements for their retailers), retailers may choose to sell products at prices below or above this recommendation, depending on factors like wholesale costs, market demand, and competitive pricing strategies.

Synonyms

• List price
• Manufacturer’s suggested retail price (MSRP)
• Suggested retail price (SRP)

Purpose of Recommended Retail Price

As we mentioned, RRP mainly serves to provide a consistent pricing benchmark for a product. It prevents price conflicts among retailers by establishing a level playing field. It discourages extreme price undercutting that could harm profit margins and ensures competition is based on factors like quality and service rather than solely on price.

Manufacturers also set an RRP to maintain some level of control over their product pricing. Since retailers are free to set their own prices, an RRP serves as a recommended guideline for them to follow. This is particularly important for new products without an established market value.

On top of that, it helps the parent company maintain uniformity across various retail channels. Since price perception is such a crucial aspect of consumer decision-making, it ensures customers are not confused by varying prices from one store to the next.

How Manufacturers Set the Recommended Retail Price (RRP)

Setting your RRP isn’t as complicated as creating your pricing strategy or determining your pricing structure.

That said, it still involves analyzing your product costs, market demand, competitor prices, brand positioning, and consumer perception. These factors determine a price you can sell it for that’s mutually beneficial for both the manufacturer and retailer.

Calculating RRP

The RRP formula accounts for both the producer’s margin and the retailer’s margin to set a final recommended retail price.

RRP = (Producer Margin % x Unit Cost x Quantity per Package) + Retailer Product Margin

Where…

• Producer margin % is the percentage of profit the manufacturer would like to make from each sale.
• Unit cost is the production cost for each unit.
• Quantity per package is the number of units in a package (e.g., 1 unit, 6-pack, 12-pack).
• Retailer product margin is the percentage of profit the retailer expects to make from each sale.

For example, if the producer’s margin is 20%, the unit cost is $5, the quantity per package is 1 unit, and the retailer’s product margin is 15%, the RRP would be calculated as follows:

RRP = (0.20 x $5 x 1) + (0.15 x $5) = $1 + $0.75 = $6.75

Factors that affect RRP

Product costs and margins

Production costs serve as the foundation for determining retail pricing. They encompass direct expenses like raw materials and labor as well as indirect costs such as utilities and administration. Accurately calculating these costs ensures that the baseline price is set high enough to cover expenses and sustain operations.

But covering costs isn’t enough—manufacturers also want to achieve a specific profit margin. Expressed as a percentage of production costs, this guarantees a return and supports business growth.

As a simple example, if a product’s total production cost is $10, the manufacturer wants a 30% margin, and the retailer wants a 25% margin, the wholesale price would be $15 and the RRP would be $20.

This is where the manufacturer has to decide whether to use cost-plus pricing or value-based pricing.

• Cost-plus pricing is straightforward: it adds a set markup to the cost of production, guaranteeing that costs are covered and providing a consistent rate of return.
• Value-based pricing aligns RRP with the perceived value of the product to the customer.

The cost-plus approach can sometimes overlook market demand and consumer perception, making it less competitive if production costs are high. But, again, it guarantees a profit.

A value-based strategy can result in higher margins when customers see the product as offering unique benefits. However, it requires in-depth market research and can lead to fluctuating prices based on consumer trends and demand.

Market demand and competition

One of the main drivers of RRP is the supply and demand curve.

• High demand + low supply = higher RRP
• Low demand + high supply = lower RRP

Changes in consumer preferences and buying habits can lead to adjustments in RRP as well. For example, seasonal demand fluctuations might cause retailers to adjust prices to capitalize on peak shopping seasons and reduce prices during slower periods.

Manufacturers will also assess competitors’ pricing strategies to position their products effectively. Pricing too high may result in lost market share, while pricing too low can impact profit margins.

In highly competitive markets, aggressive pricing by one competitor can lead others to adjust their RRPs downward to maintain market share, potentially eroding profit margins.

Beyond this, inflation, interest rates, and overall economic health affect consumer purchasing power. For instance, during periods of high inflation, manufacturers might increase RRPs to offset rising production costs.

Distribution channels

In general, it’s best to keep pricing consistent across your sales channels — e.g., an item should be the same price online and in retail stores.

However, there are some instances where channel pricing is a better strategy:

• You want to drive traffic to one particular channel, so you run a special promotion or offer a unique deal
• Your product costs and margin differ between channels, making it impractical to keep pricing the same
• The same product has become worth less with time and you need to clear inventory (e.g., retail vs. outlet)
• Input costs and/or purchasing power vary with the region you’re selling into

Retailer agreement and price pressure

In many cases, manufacturers’ RRPs are negotiated with retailers. Manufacturers may offer a suggested RRP to provide guidance for consistency, but ultimately it’s up to the retailer to set their own price.

Retailers may also put pressure on manufacturers to lower RRPs if they want to drive additional sales, or to raise RRPs if they feel the product price won’t allow them to turn a big enough profit.

Why is RRP Important in Pricing Strategy?

We’ve already touched on why you need to set an RRP for your products. But why is it important overall for your pricing strategy?

Establishing a baseline price

An RRP provides a starting point for your retail partners, who will ultimately need to set their own prices. It represents the minimum price at which you can sell your product while still achieving that particular desired margin.

Maintaining brand image and value

Pricing says a lot about who you are as a brand.

Prestige pricing, for instance, associates your product with luxury and status. If you set RRPs too low, the retailers selling your product could wind up undermining that.

The same goes for products marketed as “affordable.” If you set a high RRP, you won’t make as much because your target market won’t see them as worth the cost.

On top of that, you want to make sure pricing is consistent across retailers so customers aren’t confused or feeling like they’re getting a different product.

Controlling (and preventing) price wars

Price wars are a battle many manufacturers don’t want to fight. RRPs help ensure that pricing is consistent and helps prevent one retailer (or manufacturer) from undercutting the others.

There are a few strategies you can use to discourage retailers from going below RRP:

• MAP (minimum advertised price) agreements
• Resale price maintenance clauses in contracts
• Bundling products to make it harder for retailers to lower prices without losing their margins on other items

RRPs also prevent retailers from selling products below cost, which is illegal in some jurisdictions.

Protecting profit margins

For both the producer and the retailer, setting an RRP is critical to ensuring a viable business model. The RRP is a happy medium between what will return an optimal profit for the manufacturer and a price that’s attractive to consumers, who are willing to buy from retailers.

Facilitating supply chain management

RRP plays an important role in inventory planning and demand forecasting. By incorporating production costs and profit margins, the RRP ensures that each product sold contributes to covering expenses and generating profit, which is vital for financial sustainability.

Best Practices for Using RRP in Setting Prices

Now that we understand the importance of RRP in pricing strategy, let’s discuss some best practices for setting prices using this approach.

Consider your target market and brand image.

Price sensitivity and willingness to pay are two important concepts to consider when setting an RRP. Your target market’s average income, spending habits, and purchasing power can help you determine the ideal price point for your products.

Your brand image is another consideration — how do you want customers to view your product when they see the price? Is it a luxury item, an affordable option, or something else entirely?

Remember, RRP is just a guideline.

RRP is a suggestion you’re making to your retailers about what they should charge for your product. Ultimately, retailers have the final say in setting their own prices. This means you have the flexibility to adjust pricing according to market trends and consumer demand.

Pay attention to your competition.

To set competitive prices, you have to know what others are doing in your industry. Of course, product differentiation will also play a role, here (you wouldn’t copy the price of a budget competitor if you’re trying to communicatee exceptional quality, for instance). But you should, at the very least, use your competition as a reference point.

• What pricing model are they using?
• Do customers respond well to their pricing methods?
• How is your product and target market different?

Take the elements that are already working well, then adapt your strategy to your particular situation.

Determine the ideal pricing strategy for your product.

We’ve already touched on how cost-plus and value-based pricing are the main strategies you’ll use when pricing products. In general, cost-plus is better when production costs are stable and elasticity is low. Value-based pricing works well for new or highly differentiated products.

Depending on the product, you could also consider dynamic pricing. Dynamic pricing is an approach where prices change according to external factors, such as market demand or competitor pricing.

It can increase your agility as a business, as you can optimize pricing in real time. But it requires sophisticated software to set up and only works when customers are okay with paying different prices for the same product at different times.

Drive sales with special offers.

There are tons of ways you can do this as a supplier:

• Bundling
• Volume discounts
• Seasonal promotional offers
• Tiered pricing for different quantities or features
• Special pricing agreements for enterprise customers
• Promotions that partner with retailers’ marketing efforts

Especially in the case of reduced wholesale prices for your biggest customers, these methods can help you distribute products quickly and maintain a good relationship with retailers.

Watch out for legal compliance issues.

Price discrimination, predatory pricing, and price fixing are some common examples of illegal pricing practices. As a supplier, you can’t dictate or control the prices set by your retailers. And as a retailer, you can’t collude with other retailers to set prices at a certain level.

Continuously monitor pricing performance.

Most importantly, you need too make sure you evaluate your pricing strategy on a continuous basis. Look at the effects of your pricing strategy on the product’s sale volumes and profit margins. And measure customer satisfaction by conducting surveys or analyzing reviews.

Periodically, test different pricing levels with your retailers to see whether you can optimize sales numbers with a lower RRP, increase profits with a higher RRP, or if you’re doing well with the current strategy.

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