Manufacturer’s Suggested Retail Price (MSRP)
The price at which the manufacturer recommends selling its product by retailers
What is the Manufacturer’s Suggested Retail Price (MSRP)?
The manufacturer’s suggested retail price (MSRP) is the price at which the manufacturer recommends retailers sell its product. The MSRP generally reflects all the manufacturing and selling costs associated with a product. It is also known as the list price, or the recommended retail price (RRP), or the suggested retail price (SRP).
The MSRP is neither a price ceiling nor a minimum price; rather, it corresponds to most consumers’ expected price. Although the MSRP is mostly used with automobiles, retail producers also use MSRPs.
The manufacturer’s suggested retail price usually applies to branded products or higher-priced goods, such as electronics and appliances. The MSRP mainly serves as a reference point, manipulating the consumers’ willingness to pay for goods from store to store.
Purpose of the MSRP
The purpose of the manufacturer’s suggested retail price is the standardization of selling prices among different retail locations. The MSRP is intended to curb deceptive pricing practices and standardize prices of goods within a trade area of the company’s retail outlets.
The standardization of prices also seeks to ensure that basic and prime commodities are constantly available at reasonable prices without denying manufacturers a fair return on investment. It ensures that all parties involved in a transaction (manufacturer, wholesaler, retailer) will be able to earn profits at the end of the final sale.
Although the price is called “suggested,” retailers generally can sell the products purchased from the manufacturers at the MSRP, as well as below it. The practice of selling the products below the MSRP is especially common in situations when the manufacturer sets a high suggested price while the retailers purchase the products at an extremely low wholesale price. In addition, the retailers may sell at a price below the MSRP to attract consumers or to remove excess inventory.
Applications of the MSRP
The suggested retail prices can be found in products in different industries. One of the most notable examples of the frequent application of the MSRP is in the automobile industry.
For example, in the United States, automakers are obligated by law to display a vehicle’s price on its windshield or spec sheet. In the US automobile industry, the manufacturer’s suggested retail price (MSRP) is also known as the sticker price because it is placed on a Monroney sticker on the vehicle’s window.
On the other hand, the manufacturer’s suggested retail price is different from the invoice price, which a dealer pays to the manufacturer. Previously, car dealers could impose arbitrary markups, often with costs artificially inflated to over-compensate total production costs. Currently, the MSRP is used by customers as the negotiation starting point before settling at a fair price.
MSRP and Competition Theory
The commonly used argument against the use of the MSRP is that the concept contradicts the competition theory. The theory states that in a perfectly competitive market, all companies in the market are price takers and cannot influence the market price of their products.
However, the MSRP provides a loophole for a manufacturer to influence a higher than usual price of a product – an act that poses adverse effects on consumers and their disposable incomes. One of the concerns regarding the practice is that manufacturers may set the suggested price at a level higher than the price derived solely from market forces. In such a case, the high levels of prices will adversely affect consumers.
Additional Resources
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
