Eli5 How does supply chain and MSRP work?

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How does MSRP work for things such as video games and video game consoles? Are stores supposed to sell items at the MSRP? Do stores buy these items from the manufacturer below MSRP and then make a profit when they are sold at MSRP? What happens when the manufacturer wants the price to go down how are stores made aware of this?

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5 Answers

Anonymous 0 Comments

MSRP is generally meant to be respected, but its not strictly enforced, but its generally respected. Its the “suggested” price of an item to the consumer. The specific product isn’t that important.

If a manufacturer sees a vendor not selling at MSRP, they may contact the vendor and ask why, they may even decline to provide them with further products until they respect the MSRP, or they may not give a shit. This can be both below or above the MSRP. Both are a potential problem. Yes, places may sell below MSRP.

Additionally, in some rare cases, items in extremely high demand and low supply may have an MSRP that many vendors don’t respect as it is much too low for the supply and demand, and may raise prices to capitalize on that. Manufacturers may or may not care but generally aren’t happy about it and it may cause tension. When a manufacturer sets an MSRP, they are trying to signal to vendors and consumers the price they should pay and they want to keep the consumer/end user happy.

There’s also some unique cases, such as maybe a supplier in a geographic area that is expensive to get the product to (like say a remote island), they may need to charge above MSRP due to cost to get products there, and manufacturers know that and understand it.

Anonymous 0 Comments

Goods are typically bought well below MSRP, like half. The MSRP is often the highest an item can be sold for, and at least before recent times it was common to see items discounted off that price all the time, with larger discounts for sales.

Like a TV might have an MSRP of $799 but sold at Best Buy, Target, Amazon, etc. at $699 and even as low as $629 for sales. But the stores probably paid like $350 for the TV wholesale, with the spread between wholesale and retail price covering store rent, employee wages, advertising, etc. and profits.

What I’ve noticed due to supply chain contraints, inflation, etc. is that rather than officially raising MSRP, more stores are selling goods at or closer to MSRP. Maybe that TV is now selling for $759 instead of $699, which is now the “sale” price you’ll see from time to time.

Anonymous 0 Comments

When I worked for Target they paid 37 for a 59.99 game. They’d end up clearancing them out for 90 percent off after a while and you could scoop them for pennies on the dollar. If they wanted to sell the games for 38 then EA or Activision wouldn’t come after them, they’ve been paid for their services.

Anonymous 0 Comments

I make widgets. It costs me $2 per widget to make them (including all my materials, labor, equipment, etc). I sell the widget to the Widget Emporium for $5. I, the manufacturer, make $3 per widget. I suggest to WE that they could sell my widgets for $10 each. Maybe I did some market research, maybe I’m comparing with competitor widget prices, whatever. Part of convincing Widget Emporium to buy my widgets includes telling them how much money they could be making by selling my widgets.

Now WE is a massive business and they sell many widgets, not just mine. They do their own market research and collect customer data and they figure out that if they sell my widgets for $8, customers are more likely to buy multiple of my widgets, or perhaps also buy another widget that they are selling at a price higher than what that manufacturer suggested. According to their research, by selling my widget for a little bit less than they could, they wind up making more money overall.

Sometimes prices on an item will be so low that Widget Emporium actually loses money on it—say they sell my widget for $4, which is less than then $5 they paid me. This price is so low, it leads customers to come in who maybe would have bought my widget directly from me, or at a different store. Once the customer is in the store, they realize they also need several other widgets and buy them. Or they buy accessories for the widget. This is called “loss leading”, where you sell an item at a loss knowing it will spur additional spending on items with much better profit margins and lead to more profit than if you just sold the first item at the suggested retail price.

Anonymous 0 Comments

So with videogames, the actual “product” that you’re buying, which is the disc & the package it comes in, is actually *really* cheap. It’s about $0.05 of moulded plastc, $0.10 worth of printed paper including the manual, and maybe a $0.20 disc. All in all, the manufacturing cost is actually less than $1.00. However, they still have to pay royalties for having the “Playstation”, “XBOX”, and other brand logos on the packaging, so that adds a bit of additional expense. But what makes it worth $60 is of course, what’s *on* the disk. That’s the MSRP price set by the publisher.

So, for a game stop, they’ll buy say 300 copies of the game directly from the publisher for a discounted price, say $45 each, but it’s agreed upon that they will sell them at $60 for at least 3 months after launch. The publisher immediately gets $13,500 in up front cash minus the ~$300 or so that it costs to pay the royalties and have them manufactured. Gamestop gets $15 for every copy they manage to sell, plus any extra that people paid for pre-orders, limited editions, etc. In total game stop could make up to $4,500 if they completely sell out. Minus whatever it costs to have a box of 300 games shipped to them.

Now let’s say the game doesn’t do too well and they only sell 100 copies in those first 3 months, now that the agreement is up, game stop might lower the price to $50 to get rid of the 200 they still have left without taking a loss.

For supply chain, typically the publisher will comission a manufacturer to make a set number of initial copies, based on how many they expect to sell. Then they negotiate deals to offload them on to retailers, who then sell them at MSRP. The manufacturer profits because the comission is more money than whatever it costs them to manufacture the discs & packaging. The publisher profits from the deals negotiated with retailers, and retailers profit from the difference between those deals, and the MSRP price. If the game does very well, the publisher may order more copies to be made, and repeat the process again.

It is important to note that both the publisher and retailers are taking a risk. The publisher takes the risk of ordering more copies than the retailers are willing to buy and retailers are taking a risk because they may not be able to actually sell the games above the price they paid for them.