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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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.
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