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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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.
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