How does a manufacturer determine retail price of a product?
You see that dealers, distributors, set pricing for you. Manufacturers retail pricing seems to be nebulous towards the final pricing a product is offered at.

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How does a manufacturer determine retail price of a product?

Ummm, their business, their right albeit manufacturers can exhibit pressure not to disparage retail prices.

What you are asking is not a very easy question to answer. Much of the final price of a product is based on the distribution chain which affects how many people "step on" the final price.

I'm a product design engineer and I know that internally we will always determine the cost of the product which includes materials, direct labor, packaging, & shipping. Then you use an "overhead" multiplier to cover some fraction of fixed costs. Finally, you tack on capital costs (based on depreciation of investment), warranty costs, etc. Once you have this "cost", you'll evaluate minimum margin requirements to set your "wholesale price" now, depending on your distribution chain, each party has a similar formula for determining their minimum price. At the end you wind up at the street price. MSRP should reflect this number.

Keep in mind, a lot of this is done at the back end well before a product is actually fully developed. Marketing Managers are often responsible for this part and they work with guys like me to determine what the ROI (return on investment) will be to decide if we are going to even develop the product in the first place. For my industry, about one in ten products actually gets developed given capital restraints and the "value price" for the product that market research dictates. We actually work it backwards from the value price to determine cost basis and capital limits to meet target, then work it forward if our initial estimates appear reasonable.

Again, this is often very industry specific and I can't speak to the methodology for retail consumer goods which have to take into account other loss costs, stale inventory, and probably other stuff I just don't know.

Ken S

Retail price is determined at the beginning of product inception. Marketing comes up with a new product or a significant product variation. They determine what features customers want and how much customers will be willing to pay for it. Maybe different price points for different models are called for.

Then they work backwards from the retail price to what profit the retailer would expect. Then they subtract what the distributors expect to make. This results in a manufacturer’s price. Then from the manufacturer’s price, they subtract the expected manufacturer’s profit as a percent like the previous subtractions. They take out sales and operating expenses. Then they take out the standard manufacturing overhead costs based on the expected volumes. High volume means many more units to absorb the overhead costs. Small volume means each unit has a higher overhead because the total overhead costs has to be spread over fewer units. For example, the salary of a factory manager is spread per unit.

At this point, what’s left is the direct labor and parts costs for the product. Then Marketing goes to the product engineers and manufacturing engineers to design the product and manufacturing process to produce the product at the target direct labor and material costs.

Then it’s a tug of war with the engineers saying it’s impossible to design the product with so much features specified for the target cost and marketing says they have to because that’s what customers want and everybody else’s cuts leaves only so much for the product costs itself.

To reiterate the answer to your question, prices are determined by marketing through research to see what price(s) the market will bear. Price is determined by the market and product cost is determined by the price and expected profit margin requirements of every one in the chain.

Jim,

Just like KenS and Rey HRH said. It's overly simplified but basically marketing researchers will see what prices consumers are willing to pay, figure out everyone's cut (and there seem to be a lot of people taking a cut) and they see if the product can be manufactured for a profit for everyone.

It's industry specific, too. Some items just have larger markups than others. You look at a grocery store and I believe the store itself is making around 3% while a new built home, from what I've recently been told, is around 20%.

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Originally posted by smschulz:

quote:

How does a manufacturer determine retail price of a product?

Ummm, their business, their right albeit manufacturers can exhibit pressure not to disparage retail prices.

This is possibly the most worthless answer I've ever read on this forum.