263 Section 10.2 Price Copyright Goodheart-Willcox Co., Inc. Manufacturer’s Suggested Retail Price Some retailers use the manufacturer’s suggested retail price (MSRP), which is the list price recommended by a manufacturer. The MSRP is only a suggested price. Retailers are not usually required to use it. However, some high-end manufacturers require retailers to use the MSRP. Often, these manufacturers produce well-known brands and do not want price competition among the retailers offering the products. For example, distributors of video games are usually required to use the MSRP so smaller stores can compete with larger stores. Large stores can buy in large quantities to reduce per-unit cost. If the large stores were not required to use the MSRP, they could set a price below what the smaller stores pay to purchase the same games. By requiring products to be sold at the MSRP, the brand name and price is preserved. Pricing Factors All businesses have factors that impact their pricing decisions. Expenses, competition, regulation compliance, a product’s life cycle, and supply and demand may affect prices. Each business will need to take into consideration some or all of these factors. Pricing policies take into consideration expenses, competition, and governmental regulations. Expenses All goods and services have certain expenses related to creating them and getting them to the end users. Expenses such as employee wages, shipping, utilities, rent, and other operating expenses affect pricing. There are two basic types of expenses: fixed and variable. Fixed expenses do not change and are not affected by the number of products that are produced or sold. Fixed expenses include rent, salaries, and loan payments. Whether 100 or 1,000 items are sold in a month, fixed expenses remain the same. Variable expenses change based on activity of the business. Variable expenses include advertising, packaging, and shipping. The cost of extending credit, which is discussed in a later chapter, may also be included. Figure 10-2 shows examples of fixed and variable expenses. Competition Competitors are going to pay attention to your prices. You need to also pay attention to their prices as well. Will you charge a higher price, a lower price, or match the price of competitors? As discussed in chapter 5, price competition is pricing a product lower than the competition to encourage customers to buy your product. Nonprice competition is positioning a product as more valuable to the customer because of service, appearance, or other factors unrelated to its price.