Determining the correct retail price for a product is extremely important. Too high and nobody may buy it. Too low and it may be viewed as a cheap, commodity item. If only there was a price-predicting crystal ball to guide us!
Obviously, any retail price must support acceptable margins for both the brand and the retailer. But should it be a multiple of landed cost to wholesale then some multiple of wholesale to retail? Should it be the price a brand wants the product to sell for (based on determining a perceived value)? There are many methods to help figure it out.
Ultimately, whatever the retail price is determined to be, unless a brand has an MRP (minimum retail price) policy, all they can really do is establish a wholesale cost that supports a reasonable MAP (minimum advertised price) and offer an MSRP (minimum “suggested” retail price). Both of these should reflect the perceived value and support fair margins. So, what’s the difference between these three pricing concepts? There are several.
MAP - A minimum advertised price (MAP) policy is a unilateral statement by a brand that tells retailers the lowest price at which a product MAY BE “ADVERTISED.” The ultimate in cart or cash register price is not contemplated. The MAP policy price is determined using the same criteria as MSRP but it generally allows for a certain level of discounting. The ultimate objective of a MAP pricing policy is to help retailers sell high volume, while maintaining an acceptable profit margin for all (often described as a level playing field).
MRP - MRP is a policy that states the minimum price at which a product MUST BE “SOLD.” In a brick and mortar store, it’s the cash register price. In ecommerce, it’s the final checkout price from the shopping cart. Although many retailers feel that minimum retail pricing policies are antitrust, when implemented properly, they’re not. They are, however, extremely difficult to maintain equally. This is one of the reasons that brands like Apple and Coach have their own stores and limit distribution to a small selection of retail partners.
MSRP - Manufacturer’s Suggested Retail Price (MSRP) is not a policy. Brands establish MSRP in order to show retailers the optimal price at which a product “SHOULD/COULD BE SOLD” in order to make an acceptable margin. The MSRP is determined using a variety of factors such as the cost of landed goods at scale, as well as a price that conveys a perceived value. Unlike an MRP policy price, MSRP is not an edict, just a “suggestion.” Therefore, MSRP is not a policy.
In many industries, MSRP is determined by doubling the wholesale cost; a practice known as “Keystone Pricing.” However, not all industries use this practice because margins are different depending on the brand’s distribution model. For instance, in the apparel industry, MSRP is generally determined by tripling wholesale. And when a brand sells via wholesale distributors, they sometimes allow the distributors to determine the MSRP.
One of the drawbacks to MAP and MRP policies is that, even if properly implemented, there is no legal remedy for either. Penalties for non-compliance are limited to changes in business relationships. Some of those penalties include: loss of discounts, terms, coop funds, authorized reseller status and, ultimately, the ability to purchase the brands’ products. In order to set a basis for legal remedy, brands utilize other policy types, such as IP Rights and Authorized Reseller policies.
If you’d like to discuss your pricing strategies with one of MAPP Trap’s experts simply email email@example.com. Of course, if you’re a true Swami with a spot-on crystal ball, please email us with our fortune.