Recommended Retail Price
RRP (Recommended Retail Price): Meaning, Calculation & Usage
The Recommended Retail Price (RRP), also known as the Suggested Retail Price (SRP), is the price recommended by the manufacturer for selling a product. The RRP serves the purpose of establishing a consistent pricing benchmark across various sales channels and provides resellers with insight into the perceived value of the product.
It offers a reference point to maintain price consistency and ensures that consumers are offered a similar product cost, regardless of where they make their purchase.
How To Calculate the RRP?
The Recommended Retail Price (RRP) is calculated using the following formula:
RRP = (Producer Margin x Unit Cost x Quantity per package) + Retailer Product Margin
- Producer Margin: This represents the profit percentage that the producer or manufacturer aims to earn on each unit of the product.
- Unit Cost: This is the cost incurred by the manufacturer to produce a single unit of the product.
- Quantity per Package: Refers to the number of units included in a single product package or item.
- Retailer Product Margin: Indicates the profit percentage that the retailer who sells the product expects to earn on each unit.
By plugging these values into the formula, you can determine the RRP for the product. The RRP is a guideline for retailers, providing them with insight into how the product's price should be structured, ensuring a consistent pricing strategy across different sales channels.
How To Use the RRP?
Manufacturers use Recommended Retail Prices (RRP) to maintain price consistency across various stores and prevent significant price discrepancies. For example, consider two stores selling the same product, like a toothbrush, with one offering it at £5 and the other at £2. A customer entering the first store might find the toothpaste unreasonably expensive, potentially tarnishing the brand's image. To avoid this, retailers often align their prices with the RRP, which is publicly available.
While retailers can set their own prices, they must take the RRP into account. Typically, the RRP is marked up using 'keystone' pricing, which involves doubling the cost price. This helps retailers offer products within the general pricing range suggested by the manufacturer and maintains a consistent brand image, preventing customers from perceiving the brand negatively due to price disparities.
Can Retailer Differ From the RRP?
It can be beneficial to deviate from the Recommended Retail Price (RRP) under specific circumstances:
Going Below the RRP:
- High Volume Sales: If your business operates with significant sales volume, offering products below the manufacturer's RRP can be a strategic move to attract more customers. However, be cautious as some manufacturers and distributors may disapprove due to potential implications for their brand image.
- Inventory Clearance: When you need to clear out existing inventory quickly, pricing products below the RRP can expedite the process. This may be necessary for various reasons, such as the introduction of new products rendering current stock obsolete or the depreciation of product value over time. In grocery stores, perishable items like milk and vegetables require rapid inventory turnover.
Going Above the RRP:
- Negotiation-Friendly Markets: Certain markets, like car dealerships, often price products above the RRP because customers expect negotiation. For popular models with high demand, especially new arrivals, buyers may be willing to pay more.
- Regional Demand and Supply: Depending on the availability of goods in a specific region or during a particular time, going above the RRP can be justifiable. For instance, if there are limited 24/7 stores in an area, they can charge higher prices due to increased convenience.
Ultimately, pricing decisions should consider your cost structure, desired profit margins, and market conditions, with the flexibility to adjust prices according to your business goals and customer expectations.
Recommended Retail Price: Key Takeaways
- The Recommended Retail Price (RRP) or Suggested Retail Price (SRP) is the manufacturer's suggested product price, serving as a benchmark to maintain consistent pricing across various sales channels, ensuring a uniform consumer experience.
- The RRP is calculated using a formula that incorporates the producer's desired profit margin, unit cost, quantity per package, and the retailer's expected product margin, providing guidelines for setting product prices.
- Retailers often align their prices with the RRP to prevent significant price variations and maintain brand image consistency. Retailers should carefully assess when to align with or differ from the RRP based on their business goals and customer expectations.